Bernanke to lenders: Lower home loans

Fed chairman thinks action could allay recession fears
By JEANNINE AVERSA, Associated Press

Posted Wednesday, March 5, 2008

Federal Reserve Chairman Ben Bernanke wants lenders to write down principal.
WASHINGTON -- Battling a dangerous wave of home foreclosures, Federal Reserve Chairman Ben Bernanke called Tuesday for additional relief and urged lenders to help distressed owners by lowering the amount of their loans.

"This situation calls for a vigorous response," Bernanke said in a speech to a banking group meeting in Orlando, Fla.

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," Bernanke warned.

Rising foreclosures threaten to worsen the problems in the housing market and for the national 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, neighborhoods and the nation as a whole," 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."

One suggestion 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," Bernanke said.

He acknowledged this idea might be a tough sell to lenders. Lenders, he said, are reluctant to write down principal. "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," Bernanke said.

Bill Stevens, chief executive officer of CapitalBank in Greenwood, S.C., said: "We've been talking about it as bankers. It's a tough business decision."

Tom Loonan, vice president of the State Bank of Easton in Minnesota, suggested that debt relief for some who got in over their heads may anger those who took out mortgages they could afford. "There's going to be some animosity," he said.

Still, Bernanke suggested such longer-term permanent solutions may work better than shorter-term and temporary ones, where the distressed homeowner could be in trouble again.

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.

Brookly McLaughlin, spokeswoman for the Treasury Department, which has been leading the Bush administration's relief efforts, noted that foreclosures are expensive for both lenders and homeowners, giving parties an incentive to renegotiate a mortgage contract. However, "we're not going to dictate how those renegotiations should be accomplished," she said. "If lenders find that in some cases a principal writedown is less costly than foreclosure, then that is an option they have the incentive to consider."

More than half of the projected 1.5 million home foreclosure proceedings started in 2007 were on subprime loans given to borrowers with blemished credit histories or low incomes.