Bernanke outlines mortgage help plan

Federal Reserve chairman Ben Bernanke outlined the Fed's response to the subprime crisis Friday.

Quick Vote

What are you most concerned about?

• Your house
• Your debt
• Your job
• Your savings

or View results

NEW YORK (CNNMoney.com) -- Federal Reserve chairman Ben Bernanke outlined the central bank's proposal Friday to stem the subprime meltdown.

In a speech at the National Community Reinvestment Coalition's annual meeting, Bernanke said that the Fed is working to curb unfair lending practices to protect borrowers of adjustable rate mortgages.

"The Federal Reserve is strongly committed to fully employing our authority, expertise, and resources to help alleviate [borrowers'] distress," Bernanke said in written remarks.

Bernanke outlined four responses the Fed is proposing to alleviate the crisis:

Prohibiting lenders from issuing loans that borrowers cannot repay. Much of the mortgage crisis was pegged to borrowers that took out loans with low initial rates that reset to much higher rates down the road. Many homeowners could not afford the higher rates and their loans resulted in foreclosure.

Make lenders verify the income and assets of the borrower. Often called "stated income" lending, lenders would issue credit approvals for borrowers with poor credit or insufficient income to repay a loan.

Require escrow accounts for higher-priced loans. For borrowers who do not understand the scope of repaying loans, the Fed suggests higher-priced loans have a separate account for real estate taxes and hazard insurance, which is standard in prime lending.

Ban repayment penalties including "loan-flipping." The Fed proposes to ban schemes in which lenders force borrowers to refinance at a higher rate that they cannot afford.

"Our goal was to produce clear and comprehensive rules to protect consumers from unfair practices while maintaining the viability of a market for responsible mortgage lending," said Bernanke.

President Bush also addressed the housing crisis Friday. Speaking before The Economic Club of New York, Bush acknowledged Friday the country was facing challenges both in the housing and financial markets, but said that the strength of the underlying economy would help it maneuver through this difficult period.

But he also called on Congress to take additional steps to help alleviate the woes resulting from the housing crisis, including reforming government-sponsored enterprises Fannie Mae and Freddie Mac. He also pushed lawmakers to modernize the Federal Housing Administration and to extend tax cuts on capital gains and set to expire in the coming years.