As the House prepared to take aggressive steps to stem the wave of home foreclosures, Federal Reserve Chairman Ben S. Bernanke on Monday night endorsed the need for government intervention, saying that letting markets take their own course could "destabilize communities, reduce the property values of nearby homes and lower municipal tax revenues."
In a speech in New York, the central bank chairman reiterated his controversial call for lenders and mortgage service companies to consider cutting the principal of some customers' loans to prevent foreclosure.
"When the source of the problem is a decline of the value of the home well below the mortgage's principal balance, the best solution may be a write-down, perhaps combined with" a government-orchestrated refinancing, Bernanke told a Columbia Business School audience.
Bernanke stopped short of endorsing a bill introduced by Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, that would allow the Depression-era Federal Housing Administration to guarantee repayment of up to $300 billion in mortgages in return for lenders' making steep cuts in mortgage holders' loan balances.
The Fed chairman did say, though, that Congress "can take an important step by moving quickly to reconcile and enact legislation permitting the [FHA] to increase its scale. . . ."
It wasn't the first time Bernanke called for lenders to accept steep cuts in loan repayment or for government to step in to slow the pace of foreclosures. He first broached both ideas in a speech in March.
But coming just as Congress was about to take up the foreclosure issue, the central banker's remarks appeared designed to answer critics of intervention who argue that the two steps run the risk of rewarding financial bad behavior by borrowers and would involve trampling the legal sanctity of contracts.
Though the bulk of Americans continue to make their mortgage payments on time, Bernanke's argument goes, late payments and foreclosures have become so widespread that they pose threats that go well beyond individual borrowers and lenders.
"High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets and the broader economy," he said. "Therefore, doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It's in everybody's interest."
Bernanke said the current rash of foreclosures didn't follow the traditional pattern of home loss. In the past, he said, individual homeowners who had been hit by a job loss, serious illness or injury or divorce found themselves unable to keep up their mortgage payments and were forced to give up their homes.
Now, he said, a new and very different force is "playing an increasing role in many markets: declines in home values, which reduce homeowners' equity and may consequently affect their ability or incentive to make the financial sacrifices necessary to stay in their homes."
He presented what he described as "heat maps" that traced, county by county, both home price declines and mortgage delinquencies. Price declines have been strikingly concentrated in the three-state region of California, Nevada and Arizona, as well as in Florida and Michigan, and mortgage delinquencies have followed a nearly identical pattern, the maps show.
"Loan servicers are used to dealing with mortgage delinquencies related to life events such as unemployment or illness, with the most common approaches being a temporary repayment plan or the folding of missed payments into the principal balance," Bernanke said.
"A widespread decline in home prices, by contrast, is a relatively novel phenomenon," he said, "and lenders and servicers will have to develop new . . . strategies to deal with this issue."
Since last fall, the Fed has been engaged in one of the swiftest reductions in the interest rates that the central bank controls. One aim of the rate cuts, Bernanke said, has been to help stabilize the housing and mortgage markets by making it cheaper to borrow for a house and easing the financial pain of sharp jumps in required payments under adjustable-rate mortgages.
In addition, the central bank has reversed a long-standing reluctance to fully use its regulatory powers by proposing strict new rules to protect consumers by outlawing a long list of what it labels "unfair and deceptive mortgage lending and advertising practices." It has also sought to extend its regulatory reach to include the nonbank lenders and mortgage brokers that made many of the most troubled loans in the current crisis.
Nearly 2% of America's 50 million-plus mortgage borrowers were three months or more behind on their payments by the end of 2007, up by half since 2004. Lenders and servicers launched 1.5 million foreclosure proceedings last year, up by half from just the year before, and that number is expected to climb this year.
Bernanke acknowledged that some borrowers were in too far over their heads to avoid foreclosure. But, he added, many homeowners could be kept in their homes through a combination of principal cuts and government-aided refinancings.