WASHINGTON Battling a dangerous wave of home foreclosures, Federal Reserve Chairman Ben Bernanke on Tuesday called for additional relief and urged lenders to help distressed owners by lowering the amount of their loans.
"This situation calls for a vigorous response," Bernanke said in a speech to a banking group meeting in Orlando, Fla.
Even with some relief efforts under way by industry and government, foreclosures and late payments on home mortgages are likely to rise "for a while longer," Bernanke warned.
Rising foreclosures threaten to worsen the problems in the housing market and for the national economy, which many fear is on the verge of a recession or in one already.
"Reducing the rate of preventable foreclosures would promote economic stability for households, neighborhoods and the nation as a whole," Bernanke said. "Although lenders and servicers have scaled up their efforts and adopted a wider variety of loss-mitigation techniques, more can, and should, be done," the Fed chief said.
One of the suggestions Bernanke made was for mortgage and other financial companies to reduce the amount of the loan to provide relief to a struggling owner. "Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure," Bernanke said.
Bernanke acknowledged this idea might be a tough sell to lenders. Lenders, he said, are reluctant to write down principal. "They say that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again," Bernanke said.
Bill Stevens, chief executive officer of CapitalBank in Greenwood, S.C., said: "We've been talking about it as bankers. It's a tough business decision."
Tom Loonan, vice president of the State Bank of Easton in Minnesota, suggested that debt relief for some who got in over their heads may anger others, who took out mortgages that they could afford. "There's going to be some animosity," he said.
Still, Bernanke suggested such longer-term permanent solutions may work better than shorter-term and temporary ones, where the distressed homeowner could find himself in trouble again. "When the mortgage is 'under water' a reduction in principal may increase the expected payoff by reducing the risk of default and foreclosure," he said.
To date, permanent home mortgage modifications that have occurred have typically involved a reduction in the interest rate, while reductions of the principal balance of the loan have been quite rare, he said.