Bernanke says need to do more to halt foreclosures

WASHINGTON - U.S. Federal Reserve Chairman Ben Bernanke on Thursday urged more aggressive steps to halt home foreclosures and said government-funded programs could help strapped homeowners.

"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 at a Fed conference on housing and mortgage markets. "More needs to be done."

Bernanke said evidence that homeowner equity is an important determinant of default rates points to a need to write down loan principal to help people stay in their homes.

"Principal write-downs may need to be part of the toolkit that servicers use to achieve sustainable mortgage modifications," he said.

The U.S. economy has been in recession since December 2007, experts determined this week, with little hope for a speedy recovery as losses and defaults continue to roil housing and financial markets.

Bernanke painted a grim picture of strains for homeowners. As many as 20 percent of borrowers owe more than their homes are worth, he said. Lenders appear to be on track for 2.25 million foreclosures in 2008, compared with an annual pace of 1.0 million before the crisis, he added.

Government rescue efforts to date have emphasized stabilizing financial markets with capital infusions aimed at restoring bank health. But those measures have failed to stimulate any significant rebound in lending, and momentum is growing for relief for strapped homeowners.

Bernanke said that steps that stabilize the housing market will help stabilize the broader economy.

The Fed chairman said a number of proposals, all using public funds, hold promise for slowing foreclosure rates.

These include a Federal Deposit Insurance Corp plan that would reward participating lenders by sharing the cost of defaults on restructured loans. The FDIC, the bank regulatory agency that manages the fund that insures bank deposits, says the plan would prevent 1.5 million foreclosures.

The plan has the merits of standardizing the loan restructuring process and of keeping the restructured loans in the hands of the company collecting payments, meaning the government would only be involved only when a re-default occurs, he said.

Bernanke also said a program aimed at putting delinquent borrowers into new home loans insured by the Department of Housing and Urban Development's Federal Housing Administration might attract more participants if the Treasury Department bought securities issued by Ginnie Mae.

Those purchases could bring down the interest rate for those loans, currently around the relative high rate of about 8.0 percent, but would require Congress to raise the federal debt ceiling, he said.

Other proposals that have potential include having the government share the cost of reducing monthly payments for borrowers or buy delinquent or at-risk mortgages in bulk and refinance them through the FHA, Bernanke said.