Financial Update (First Quarter 2008)

Fed Chief Speaks About Mortgage Ills, Solutions

Ben Bernanke In an early March speech to the Independent Community Bankers of America, Federal Reserve Chairman Ben Bernanke discussed the roots of problems in the nation's mortgage market along with measures that might help reduce preventable foreclosures.

"Community bankers are well positioned to contribute to these efforts, given the strong relationships you have built with your customers and your communities," Bernanke said at the group's annual convention in Orlando, Fla.

Fed chief urges workouts
He said bankers should seize the opportunity presented by modernization and expansion of the Federal Housing Administration (FHA) to better serve their customers and communities. Bernanke noted that the FHASecure plan, which was announced late last summer, offers qualified borrowers who are delinquent because of an interest rate reset the opportunity to refinance into an FHA-insured mortgage.

Congress and the White House also temporarily increased the maximum loan value eligible for FHA insurance, which Bernanke said should allow more borrowers—particularly those in communities with higher-priced homes—to qualify for this program and to be eligible for refinancing into FHA-insured loans.

Text of speech
FHASecure information

Bernanke also encouraged lenders to consider options including lowering a troubled borrower's interest rate or reducing the principal balance. "In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure," he said.

Data help direct actions
The Federal Reserve's efforts to help stem the foreclosure tide have focused in part on sharing timely data analysis of mortgage delinquencies with community groups and policymakers to help direct resources to areas that need them most. For example, Bernanke said, the Fed recently helped the community service organization NeighborWorks America identify regions and neighborhoods that could benefit most from additional mortgage counseling.

Based on that analysis, NeighborWorks recently distributed $130 million in newly granted funds from Congress to 32 state housing finance agencies, 82 community-based NeighborWorks organizations, and 16 counseling intermediaries around the country, the Fed chairman said.

Difficulty likely to linger
While efforts such as these are helpful, the problems in the mortgage market are unlikely to disappear soon. Bernanke said delinquencies and foreclosures will probably continue to rise "for a while longer." He pointed to several reasons, including:

  • Supply and demand imbalances in many housing markets that probably mean house prices will decline further, implying additional reductions in borrowers' equity; and

  • In 2008, about 1.5 million loans—more than 40 percent of outstanding subprime adjustable rate mortgages—are scheduled to reset to a higher interest rate. The Fed estimates that the interest rate on a typical subprime adjustable rate mortgage scheduled to reset in the first quarter of 2008 will increase from just above 8 percent to about 9.25 percent, raising the monthly payment by more than 10 percent, to $1,500 on average.

"Real relief for the mortgage market requires stabilization, and then recovery, in the nation's housing sector," Bernanke said. "Modernization of the FHA would be of help on this front as well. I am sure that the FHA and the Department of Housing and Urban Development, given the appropriate powers by the Congress, will make every effort to expand their operations and to help improve the functioning of the market for home-purchase mortgages."

March 25, 2008