Bernanke reiterates need for intervention, loan cuts

May 06, 2008|By Peter G. Gosselin | Peter G. Gosselin,LOS ANGELES TIMES

WASHINGTON - As the House prepares to take aggressive new steps to stem the wave of home foreclosures, Federal Reserve Chairman Ben S. Bernanke endorsed yesterday 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 last night in New York, the Fed chairman reiterated his call for lenders and mortgage service companies to consider cutting the principal of home loans, in some cases, in order to avoid 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.

He stopped short of endorsing of a bill pushed by Rep. Barney Frank, a Massachusetts Democrat and House Financial Services Committee chairman, that would allow the Federal Housing Administration to guarantee repayment of up to $300 billion in mortgages in return for lenders making steep cuts in their original loan amounts.

Bernanke 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. ..."

Last night was not the first time that Bernanke had called for lenders to accept steep loan cuts or for government to step in to slow the pace of foreclosures. He first broached both ideas in early March.

But coming just as Congress is about to take up the foreclosure issue, his remarks appeared designed to answer intervention foes who argue that the two steps run the risk of rewarding financial bad behavior by borrowers and would involve trampling the sanctity of contracts.

In a nutshell, Bernanke's argument is that while the bulk of Americans continue to make their mortgage payments, 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 wave of foreclosures represents a fundamental break from 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 very different force "is now 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."

Peter G. Gosselin writes for the Los Angeles Times.

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