Bernanke Wants Banks To Rework Mortgages
Wednesday, March 5, 2008
Federal Reserve Chairman Ben S. Bernanke yesterday called on mortgage lenders to be more willing to renegotiate with borrowers who are at risk of losing their homes and said that the crush of mortgage foreclosures is likely to continue "for a while longer."
Bernanke's comments positioned him between the Bush administration and congressional Democrats on how far the government should go to try to ease the mortgage crisis.
He publicly and explicitly urged banks to reduce the principal owed on certain loans, which the administration has not been willing to do. But he stopped well short of endorsing ideas embraced by some congressional Democrats, who want to force mortgage issuers to delay foreclosures and who support a government program to buy problem loans.
"Efforts by both government and nonprofit entities to reduce unnecessary foreclosures are helping, but more can and should be done," Bernanke said at a convention of community bankers in Orlando.
Bernanke stressed that banks and other lenders need to take action to reduce the number of preventable foreclosures -- those in which both homeowners and mortgage holders would be better off by renegotiating loans, rather than going to foreclosure.
About 1.5 million subprime, adjustable-rate loans are scheduled to reset to higher rates this year, Bernanke said. That would raise the average monthly payment by more than 10 percent, to about $1,500, he said.
"This situation calls for a vigorous response," Bernanke said. "Measures to reduce preventable foreclosures could help not only stressed borrowers but also their communities and, indeed, the broader economy."
Lenders have been willing to renegotiate mortgage loans to let borrowers with subprime, adjustable-rate mortgages keep low starter interest rates. But they have been more reluctant to renegotiate the value of mortgages. In such a situation, a lender might reduce what a homeowner owes from, say, $200,000 to $180,000, so the borrower could afford to make payments. That loss might be far less than the loss the lender would incur if it foreclosed on the house and then sold it at auction.
"In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure," Bernanke said.
Among the obstacles to such write-downs, Bernanke said, is that many investors hold pieces of any given mortgage, and they can have competing interests that lead some to favor a renegotiation of principal and others not to. Bernanke urged the mortgage industry to quickly resolve those conflicts.
"There are, no doubt, tax-related, accounting, and legal obstacles to expanding the use of principal write-downs," he said. "But just as market participants, with the help of regulators, obtained greater clarity on the use of interest rate freezes," they should do so with write-downs of principal.
The Bush administration, like Bernanke, has tried to use persuasion rather than legal force to get lenders to avoid foreclosures. But unlike Bernanke, it has not made a case for how the industry should do it.
"Treasury is not going to dictate how those renegotiations should be accomplished," Jennifer Zuccarelli, a Treasury Department spokeswoman, said yesterday. "If lenders find that in some cases a principal write-down is less costly than foreclosure, then that is an option they have the incentive to consider."