Bernanke urges banks to help homeowners

Forgiving portions of mortgages suggested

Federal Reserve chairman Ben S. Bernanke said more should be done to reduce unnecessary foreclosures. (Matt Stroshane/Bloomberg News)

Federal Reserve chairman Ben S. Bernanke, battling the worst housing recession in a quarter century, 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," Bernanke said in a speech in Orlando, Fla. yesterday. "Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure."

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," Bernanke said in the comments to the Independent Community Bankers of America. "Supply-demand imbalances in many housing markets suggest that some further declines in house prices are likely."

Subprime borrowers are about to see their mortgage rates increase more than 1 percentage point, he said. "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, homeowners could refinance, though that option is now "largely" gone because sales of bonds backed by subprime mortgages "have virtually halted," Bernanke said. "This situation calls for a vigorous response."

Bernanke didn't comment on the outlook for the economy or interest rates. Traders expect the Federal Open Market Committee to lower the benchmark rate by 0.75 percentage point by or at the panel's next meeting on March 18, based on futures prices.

Yesterday, the Fed and other regulators sent letters to institutions they supervise, encouraging the banks to report on their efforts to modify mortgages at risk of default.

The number of US homeowners entering foreclosure rose 75 percent in 2007, with more than 1 percent of all homeowners in some stage of foreclosure during the year, according to RealtyTrac Inc. of Irvine, Calif. For the year, more than 2.2 million default notices, auction notices, and bank repossessions were reported on about 1.3 million properties.

"Lenders tell us that they are reluctant to write down principal," Bernanke said. "They say 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."

The Fed chairman countered that by reducing the amount of the loan, this "may increase the expected payoff by reducing the risk of default and foreclosure."

Bernanke spoke in a state that's among the most affected by the housing collapse.