Fed Chief Urges Breaks for Some Home Borrowers

How does this work? Banks are going to say, "Well you borrowed $200 thousand dollars from us, but what the hell, just pay us back $150 thousand. I don't see the banks jumping at this suggestion. And what about those making their payments? Will they stop paying after banks start letting borrowers off the hook?


March 4, 2008

By EDMUND L. ANDREWS

WASHINGTON — The chairman of the Federal Reserve, Ben S. Bernanke, urged mortgage lenders and investors on Tuesday to reduce the principal on loans for many people whose homes are no longer worth as much as the amount they still have to repay.

Noting that delinquency and foreclosure rates have soared over the last year, and that housing prices have not stopped falling, the Fed chairman warned that efforts by the government and by industry to prevent foreclosures had not gone far enough.

“Although lenders and servicers have scaled up their efforts and adopted a wide variety of loss mitigation techniques, more can, and should, be done,” Mr. Bernanke said in a speech to a conference of community bankers in Florida.

Though the Fed chairman did not explicitly endorse a new government rescue effort, he stepped up public pressure on the industry to take more drastic measures to keep people from walking away from homes when their mortgages exceed the value of their property.

“When the mortgage is ‘underwater,’ a reduction in principal may increase the expected payoff by reducing the risk of default and foreclosure,” Mr. Bernanke said. The Fed chairman warned that a large and growing number of recent home buyers now owe more than the value of their homes and may have no incentive to keep making payments.

His comments, with an implicit call for banks to give up some of their income from mortgage loans to forestall defaults, contributed to a day of declines on Wall Street. But stocks pared their losses in the final hour of trading. The Dow Jones industrial average, down more than 200 points early in the afternoon, closed off 45.10 points at 12,213.80.

Mr. Bernanke stopped well short of calling for a government-mandated rescue operation, and delivered his recommendations mainly in the form of suggestions for what would be in the self-interest of lenders and investors.

But the Fed chairman’s remarks were at odds with the position staked out in recent days by Henry M. Paulson Jr., the secretary of the Treasury.

Mr. Paulson, who has pushed the industry to freeze interest rates for at least some subprime borrowers whose low teaser rates are about to expire, drew a clear distinction between helping people who could not keep up with rising monthly payments and helping people who, because of falling house prices, had no equity in their homes.

“While these equity considerations clearly impact homeowners’ financial situation, they are not the primary concern in the effort to prevent avoidable foreclosures,” Mr. Paulson said on Monday.

Mr. Bernanke, speaking on Tuesday, said some of the Bush administration’s efforts to address the problem thus far had been a “step in the right direction.” But he suggested that the government should take additional steps as well.

Though he noted that Congress and the administration are weighing proposals to expand the authority of the Federal Housing Administration to help refinance subprime mortgages, he suggested that “going beyond current proposals” would allow the F.H.A. to help more people.

He also encouraged Fannie Mae and Freddie Mac, the government-chartered mortgage companies, to raise additional capital in order to expand the number of mortgages they can guarantee and securitize.

“With few alternative mortgage channels today, such action would be highly beneficial to the economy,” the Fed chairman said.