Fed chief: Do more to stem foreclosures

Washington —- The government needs to move much more aggressively to help people avoid losing their homes to foreclosure, Federal Reserve Chairman Ben Bernanke said Thursday, trying to boost efforts that have stalled in recent weeks.

Bernanke spoke approvingly of several proposals to use government funds to help people stuck in mortgages they cannot afford.

“Steps that stabilize the housing market will help stabilize the economy as well,” he said in a speech to a housing and mortgage conference at the Fed.

Bernanke was wading into a tense debate among the Bush administration, Congress and the Federal Deposit Insurance Corp. The comments were an attempt to add urgency to those discussions without specifically endorsing any one proposal.

Lenders are on track to foreclose on more than 2 million properties this year, and losses on those loans are a major factor in the financial crisis and resulting recession.

Congressional Democrats want to use part of the $700 billion financial system bailout to buy up mortgages at risk of foreclosure, then allow people to refinance at subsidized rates. The Treasury Department has strongly resisted using that money, preferring to preserve the cash to strengthen financial institutions.

Similarly, FDIC Chairman Sheila Bair is advocating a plan in which private lenders would agree to lower mortgage payments to 31 percent of borrowers’ income in exchange for the government insuring them against a potential default. Bernanke approvingly suggested a variation of that program, in which the government would share part of the cost of lowering the payment.

Treasury officials have indicated they think Bair’s approach has promise but that they see major hurdles in executing it, especially in determining who gets help and who doesn’t. The challenge for policy-makers is finding a plan that does not reward bad behavior or encourage on-time borrowers to default intentionally in hopes of getting a better deal.

Much of the government effort so far has focused on using the Federal Housing Administration’s program for insuring mortgage loans.

Many lenders initially refused to participate in the government’s Hope for Homeowners program, launched in October to deal with the foreclosure crisis, because it required them to take a large financial hit on each troubled loan.

The FHA tweaked the program late last month to address some industry concerns.

Thursday, Bernanke said FHA could go further.

He suggested ways for the agency or Congress to help reduce interest rates on Hope for Homeowners loans, currently at roughly 8 percent. He also said the agency might consider reducing the premiums lenders and borrowers pay.

Another option Bernanke highlighted would have the government purchase delinquent loans in bulk and refinance them into an FHA program.

The fear inside the agency and among those who follow it has been that with its current resources, the FHA may not be able to handle its expanded workload or relatively new programs that require it to take on riskier loans. The agency’s share of loans dropped sharply during the housing boom and has spiked in the past year as other sources of credit tightened. FHA officials have said staffing and technology has not kept up.

Thursday, Bernanke acknowledged the capacity issue and raised the possibility of hiring outside contractors to ease the workload.