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Bernanke urges more action to fix housing slump

Vigorous response needed to reduce rising foreclosures, says Fed chief

(WASHINGTON) Federal Reserve chairman Ben Bernanke called yesterday for additional action to prevent more distressed US homeowners from falling into foreclosure.

‘This situation calls for a vigorous response,’ Mr Bernanke said in a speech to a banking group in Florida.

Even with some relief efforts under way by industry and government, foreclosures and late payments on home mortgages are likely to rise ‘for a while longer’, Mr Bernanke warned.

Rising foreclosures threaten to worsen the problems in the housing market and for the US economy, which many fear is on the verge of a recession or in one already.

‘Reducing the rate of preventable foreclosures would promote economic stability for households, neighbourhoods and the nation as a whole,’ Mr Bernanke said. ‘Although lenders and servicers have scaled up their efforts and adopted a wider variety of loss-mitigation techniques, more can, and should be, done,’ the Fed chief noted.

One of the suggestions Mr Bernanke made was for mortgage and other financial companies to reduce the amount of the loan to provide relief to a struggling owner. ‘Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure,’ Mr Bernanke explained.

With low or negative equity in their home, a stressed borrower has less ability – because there is no home equity to tap – and less financial incentive to try to remain in the home, he said.

Mr Bernanke acknowledged this idea might be a tough sell to lenders. Lenders, he noted, 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 pointed out.

Still, Mr Bernanke suggested such longer-term permanent solutions may work better than shorter term and temporary ones, where the distressed homeowner could find himself in trouble again. ‘When the mortgage is ‘under water’, a reduction in principal may increase the expected payoff by reducing the risk of default and foreclosure,’ he said.

To date, permanent home mortgage modifications that have occurred have typically involved a reduction in the interest rate, while reductions of the principal balance of the loan have been quite rare, he said.

‘Measures that lead to a sustainable outcome are to be preferred to temporary palliatives, which may only put off foreclosure and perhaps increase its ultimate costs,’ Mr Bernanke said.

Lenders last year were on pace to initiate roughly 1.5 million home foreclosure proceedings, up from an average of fewer than one million new foreclosures in the preceding two years, the Fed chief said.

More than one half of the foreclosures started in 2007 were on sub-prime loans given to borrowers with blemished credit histories or low incomes.

Source: AP (Business Times 5 Mar 08)

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