Bernanke Says U.S. Must Step Up Foreclosure
Efforts
By Scott Lanman found at bloomberg.com
December 4, 2008
Dec. 4 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke urged using
more taxpayer funds for new efforts to prevent home foreclosures, saying the
private sector is incapable of coping with the crisis on its own.
The
Fed chief outlined four possible options, including buying delinquent mortgages
and providing bigger incentives for refinancing loans. He called for addressing
the “apparent market failure” where lenders aren’t modifying mortgages
even in cases where it’s in their own economic interest to do so.
Bernanke explains Business Foreclosure
Each option would require “some commitment of public funds,” Bernanke
said, underscoring his position that the central bank alone can’t revive the
economy through its interest- rate cuts and emergency lending programs. The
Republican’s stance may also put him in line with President-elect Barack
Obama, who said yesterday that “we’ve got to start helping homeowners in a
serious way.”
“More needs to be done,” Bernanke said in a speech to a Fed research
conference on housing and mortgage markets in Washington today. “Policy
initiatives to reduce the number of preventable foreclosures should be high on
the agenda.”
The government could buy “delinquent or at-risk mortgages in bulk,” then
refinance them through the federal Hope for Homeowners program, Bernanke said.
Congress could also help reduce loan rates and lender insurance premiums, he
said.
Also today, two regional Fed officials warned that the economy, which entered
a recession a year ago, faces a lengthy slump.
Foreclosures ‘Protracted’ Slump
There will be a “protracted period of poor performance” and policy makers
should remain “vigilant” in monitoring risks to growth, Chicago Fed
President Charles Evans said in Michigan. Dennis Lockhart, president of the
Atlanta Fed, said in New Orleans the yearlong recession is worsening this
quarter and the economy will probably be “very weak” throughout next year.
Foreclosures may begin on 2.25 million homes this year, more than double the
pace before the financial crisis, he said. Estimates show as many as 20 percent
of borrowers may now be “under water,” where their mortgage is bigger than
the price of their home, Bernanke said.
“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,” Bernanke said.
Business Foreclosure Market Failure
Some foreclosures are happening “even in cases in which the narrow economic
interests of the lender would appear to be better served through modification of
the mortgage,” Bernanke said. That is partly the result of packaging loans as
securities for sale to investors, where there’s the risk of lawsuits and a
lack of “clear guidance,” he said.
While Bernanke supports increasing government efforts on foreclosures, Fed
officials have a different position toward the U.S. automakers seeking federal
aid of as much as $34 billion.
Fed officials have an aversion to extending the too-big-to- fail doctrine
beyond financial institutions. The premise of the central bank’s $85 billion
rescue of American International Group Inc. in September was that the
insurer’s failure posed a threat to the system through its role in the
derivatives market.
Other obstacles involved in lending to carmakers might be finding large pools
of collateral for the Fed to loan against. Officials are also unlikely to grant
bank holding company status to auto-firm subsidiaries as a potential conduit for
aid to the parent. Transactions between banks and affiliates are strictly
regulated by the Fed.
‘Downward Spiral’
Until problems are fixed in housing, “we’re going to have at best slow
growth,” Robert Eisenbeis, a former Atlanta Fed research director who is now
chief monetary economist with Cumberland Advisors, said in an interview with
Bloomberg Television. Bernanke is “trying to truncate what he fears will be a
downward spiral.”
Bernanke said a mortgage-guarantee proposal by the Federal Deposit Insurance
Corp. has “strengths,” including that the government is involved only if a
borrower defaults again. FDIC Chairman Sheila Bair is pressing the Treasury
Department to use authority in the $700 billion financial-rescue package to
implement the program to spur mortgage modifications.
Another option is to have the government share costs when a loan servicer
reduces a borrower’s monthly payment, Bernanke said. While this would put a
“greater operational burden on the government” than the FDIC plan, it would
“build on, rather than crowd out, private-sector initiatives,” he said.
Hope for Homeowners Scant Response
The Hope for Homeowners program, run by the Federal Housing Administration,
has signed up few lenders since it started in October because banks must write
off a large portion of the loan and pay high fees. The Fed sits on a board that
oversees the program.
Bernanke’s proposed changes would go beyond those announced last month by
Housing and Urban Development Secretary Steve Preston, who oversees the FHA. The
agency will lower the amount of the loan a lender must forgive, allow banks to
extend mortgage terms to 40 years from 30 years and give subordinate holders
immediate payment for releasing their liens.
Congress could make the program more attractive by reducing the up-front
insurance premium paid by the lender, which is now 3 percent of principal, and
the borrower’s 1.5 percent annual premium, Bernanke said.
Lenders Lower Rates
Lawmakers should also consider reducing borrowers’ interest rate, which may
be near a “quite high” 8 percent, he said. That could be accomplished by
having the Treasury buy Ginnie Mae securities, or having Congress directly
subsidize the rate, Bernanke said.
The Treasury, which already has a program to buy mortgage- backed securities
issued by Fannie and Freddie, could step up those purchases to drive down
interest rates on some loans to 4.5 percent, a government official said
yesterday. The plan is preliminary and could change.
Last week, the Fed also announced a new program aimed at lowering borrowing
costs for homebuyers, committing to buy as much as $600 billion of debt issued
or backed by government- chartered housing-finance companies Fannie
Mae and Freddie
Mac.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.
“There’s so much inventory out there that the buyer can pick and choose,” said Susan Sirles Fidler, a Realtor at Re/Max 10, Oak Lawn. But she cautioned, “The stuff that’s almost free is almost free because it’s going to cost you an arm and a leg to put it back together. It’s not buyer beware as much as buyer be smart.”
