Bernanke Says U.S. Must Step Up Foreclosure Prevention Efforts

The Fed chief outlined four possible options, including buying delinquent mortgages and providing bigger incentives for refinancing loans. He called for addressing the “apparent market failure” where lenders aren’t modifying mortgages even in cases where it’s in their own economic interest to do so.

Each option would require “some commitment of public funds,” Bernanke said, underscoring his position that the central bank alone can’t revive the economy through its interest-rate cuts and emergency lending programs. The Republican’s stance may also put him in line with President-elect Barack Obama, who said Wednesday that “we’ve got to start helping homeowners in a serious way.”

“More needs to be done,” Bernanke said in a speech to a Fed research conference on housing and mortgage markets in Washington. “Policy initiatives to reduce the number of preventable foreclosures should be high on the agenda.”

The government could buy “delinquent or at-risk mortgages in bulk,” then refinance them through the federal Hope for Homeowners program, Bernanke said. Congress could also help reduce loan rates and lender insurance premiums, he said.

Estimates show as many as 20 percent of borrowers may now be “under water,” where their mortgage is bigger than the price of their home, Bernanke said.

“Despite good-faith efforts by both the private and public sectors, the foreclosure rate remains too high, with adverse consequences for both those directly involved and for the broader economy,” he said.

Some foreclosures are happening “even in cases in which the narrow economic interests of the lender would appear to be better served through modification of the mortgage,” Bernanke said. That is partly the result of packaging loans as securities for sale to investors, where there’s the risk of lawsuits and a lack of “clear guidance,” he said.

Bernanke said a mortgage-guarantee proposal by the Federal Deposit Insurance Corp. has “strengths,” including that the government is involved only if a borrower defaults again. FDIC Chairman Sheila Bair is pressing the Treasury Department to use authority in the $700 billion financial-rescue package to implement the program to spur mortgage modifications.

Another option is to have the government share costs when a loan servicer reduces a borrower’s monthly payment, Bernanke said. While this would put a “greater operational burden on the government” than the FDIC plan, it would “build on, rather than crowd out, private-sector initiatives,” he said.

The Hope for Homeowners program, run by the Federal Housing Administration, has signed up few lenders since it started in October because banks must write off a large portion of the loan and pay high fees. The Fed sits on a board that oversees the program.

Bernanke ’s proposed changes would go beyond those announced last month by Housing and Urban Development Secretary Steve Preston, who oversees the FHA. The agency will lower the amount of the loan a lender must forgive, allow banks to extend mortgage terms to 40 years from 30 years and give subordinate holders immediate payment for releasing their liens.

Congress could make the program more attractive by reducing the up-front insurance premium paid by the lender, which is now 3 percent of principal, and the borrower’s 1.5 percent annual premium, Bernanke said.

Lawmakers should also consider reducing borrowers’ interest rate, which may be near a “quite high” 8 percent, he said. That could be accomplished by having the Treasury buy Ginnie Mae securities, or having Congress directly subsidize the rate, Bernanke said.