By Neil Irwin and Dina ElBoghdady
Washington Post Staff Writers
Friday, December 5, 2008
The government needs to move much more aggressively to help people avoid losing their homes to foreclosure, Federal Reserve Chairman Ben S. Bernanke said yesterday, trying to boost efforts that had 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. Indeed, he said the proposals were "promising options, which are not necessarily mutually exclusive."
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 C. 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 that 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 policymakers 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.
The Fed under Bernanke is attempting to fight the recession on all fronts. It has aggressively cut interest rates, rolled out huge programs to provide lending where private markets have shut down, and encouraged Congress to consider a massive fiscal stimulus.
Dealing with the foreclosure problem at the level of individual households is one more front in that effort.
"It has always been the justification for doing these things that there are broad economic effects," said Alex J. Pollock, a resident fellow at the American Enterprise Institute who studies housing finance. "It's trying to stop an adverse feedback loop in which the financial problems make the recession worse and the recession makes financial problems worse."
Although the Fed has clout, it doesn't have much direct authority over relief programs. To the degree that mortgage foreclosure efforts involve public money, that would probably come from the Treasury.
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.
Yesterday, 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 have not kept up.
Yesterday, Bernanke acknowledged the capacity issue and raised the possibility of hiring outside contractors to ease the workload.
The desire to stem foreclosures "does not rely solely on the desire to help people who are in trouble," Bernanke said, but rather the need to reduce the supply of these deeply discounted foreclosures, which have dragged down home prices and destabilized entire communities and the economy.
Economists highlighted the historic climb -- and then drop -- in home prices in many parts of the country as a key contributor to the foreclosure mess.
Paul Willen, a senior economist at the Federal Reserve Bank of Boston, said financial analysts predicted a few years ago that delinquencies would soar if there were huge price drops.
"The problem is they didn't believe that [price drops] would happen," Willen said at yesterday's conference.
As home prices kept plunging, more borrowers owed more than their homes were worth. Those who suffered a financial blow, such as a job loss, defaulted on their loans because they could not refinance their way out of trouble or sell their homes.