Fed Chief Vows to Protect the Economy

Federal Reserve Bank Chairman Ben Bernanke is seen through tree branches as he steps out on a balcony following his speech to the Federal Reserve Bank of Kansas City Economic Symposium, Friday, Aug. 31, 2007, at the Jackson Lake Lodge at Grand Teton National Park, Wyoming. (AP Photo/Ted S. Warren) (Ted S. Warren - AP)

After a five-year boom, the housing market went bust last year; problems are expected to persist well into next year as builders try to whittle down a glut of unsold homes.

During the housing slump, a combination of higher interest rates and weaker home values clobbered homeowners, especially those with blemished credit histories or low incomes holding higher-risk "subprime" loans.

With squeezed homeowners finding it impossible to make their mortgage payments or pay them in a timely fashion, foreclosures and delinquencies are soaring and are expected to get worse. Lenders have been forced out of business, and hedge funds and other big investors in subprime mortgage securities also have taken a big financial hit.

Very low initial "teaser" rates jumping to much higher rates as they reset are socking some homeowners. Analysts estimate 2 million adjustable-rate mortgages will reset this year and next. Steep prepayment penalties have made it difficult for some to get out of their mortgages. Some overstretched homeowners can't afford to refinance or even sell their homes.

A key element of Bush's plan would allow homeowners with a good credit history, but who cannot afford their mortgage payments, to refinance into mortgages insured by the Federal Housing Administration to keep from defaulting.

Most of the carnage has been in the subprime market, but problems have spread to other more creditworthy borrowers. That has sent investors into periods of panic in recent weeks, causing stocks on Wall Street to careen wildly.

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