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Bernanke urges banks to forgive part of mortgages

ORLANDO – FEDERAL Reserve chairman Ben Bernanke, battling the worst United States housing recession in a quarter century, has urged lenders to forgive portions of mortgages for more borrowers whose home values have declined.

‘Efforts by both government and private sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done,’ he said in a speech yesterday. ‘Principal reductions that restore some equity for the home owner may be a relatively more effective means of avoiding delinquency and foreclosure.’

Mr Bernanke’s call goes beyond the stance of the Bush administration and previous Fed comments.

By comparison, the central bank’s Feb 27 report to Congress called for lenders to ‘pursue prudent loan workouts’ through means such as modifying mortgage terms and deferring payments.

‘Delinquencies and foreclosures likely will continue to rise for a while longer,’ Mr Bernanke said in his comments to the Independent Community Bankers of America.

‘Declines in short-term interest rates and initiatives involving rate freezes will reduce the impact somewhat, but interest rate resets will, nevertheless, impose stress on many households.’

In the past, home owners could refinance, though that option is now ‘largely’ gone because sales of bonds backed by sub-prime mortgages ‘have virtually halted’, Mr Bernanke said. ‘This situation calls for a vigorous response.’

He acknowledged this idea might be a tough sell to lenders. Lenders, he said, are reluctant to write down principal.

‘They said that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again.’

Mr Bernanke said by cutting the amount of the loan, this ‘may increase the expected payoff by reducing the risk of default and foreclosure’.

Source: BLOOMBERG NEWS, ASSOCIATED PRESS (The Straits Times 5 Mar 08)

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