Bernanke: More foreclosure aid needed

Fed chief says a revitalized housing market is key to economic recovery, and that foreclosure prevention deserves increased government attention.

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NEW YORK (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke said Thursday that the government must do more to address foreclosures.

Bernanke, speaking at a Fed conference in Washington, D.C., said that beyond just keeping homeowners in their homes, the Fed must continue to focus on foreclosure prevention to help stabilize the housing market and economy as a whole.

"The housing market remains central to the economic and financial challenges that we face," Bernanke said. "Reducing the number of preventable foreclosures would not only help families stay in their homes, it would confer much wider benefits."

According to Bernanke, about 15% to 20% of borrowers are "underwater" on their mortgages, meaning their homes are worth less than they owe. In addition, he said, 20% of subprime mortgages are seriously delinquent. Bernanke estimated that 2.3 million foreclosures will be initiated in 2008, compared to an average of 1 million before the mortgage meltdown.

Bernanke said the Fed, Treasury Department and Federal Deposit Insurance Corp. have already planned or put in place several measures aimed at stemming foreclosures.

The government has, among other things, cut interest rates and announced a plan to buy $500 billion of mortgage-backed securities and $100 billion of debt issued by government-sponsored mortgage financers Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500).

But Bernanke said more can still be done and outlined several "promising programs." One was FDIC Chairwoman Sheila Bair's plan, which would reduce mortgage rates, extend loan terms and offer government insurance against bank losses if borrowers who receive help end up in default anyway.

Another proposal includes strengthening the Federal Housing Administration's Hope for Homeowners program by reducing the premiums paid by the lender. Bernanke suggested that Congress could give FHA the ability to set premiums on a case-by-case basis rather than an across-the-board approach.

Furthermore, Bernanke said that the interest rates borrowers pay under the program could be reduced from the current level of about 8%, which remains so high because it is hard to find buyers for FHA loan-backed securities. To fund the rate reductions, he said, Treasury could buy up mortgage-backed securities bundled by government-sponsored loan securitizer Ginnie Mae, or Congress could choose to subsidize the rate.

Bernanke said that would help put borrowers into mortgages they can afford over the long haul.

Industry sources said Wednesday that Treasury is considering a plan to purchase mortgage-backed securities to reduce 30-year fixed mortgage rates down to 4.5% from their current 5.5% level, but it appears the plan would be aimed at helping new homeowners, not borrowers in need of refinancing.

He also recommended a plan that would have the government share the cost if the loan servicer reduces the borrower's monthly payment. Current government initiatives have encouraged servicers to lower borrowers' payments, but the plans have offered little incentive to do so. Bernanke said this approach would increase the incentive, which would "improve the prospects for sustainability."

Lastly, Bernanke said the government could buy up delinquent mortgages in bulk and refinance them under Hope for Homeowners or a similar plan. He said such a plan could help more homeowners stay in their homes than if the government refinanced individual mortgages in a more selective process.

The Fed chief said all of the proposals could be used in tandem and would likely require additional public funding.

"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," Bernanke said. "More needs to be done." To top of page

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