Financial Update (Second Quarter 2008)

Fed Chair Urges Action to Stem Foreclosures

Fed Chairman Bernanke Concerted action by federal regulators and mortgage lenders could slow the pace of home foreclosures and mitigate the effects on hard-hit neighborhoods, Federal Reserve Chairman Ben Bernanke said in a speech earlier this month. Emphasizing the importance of stabilizing communities struggling with large numbers of foreclosures, he said that lenders should consider reducing the principal of some customers’ loans to help them avoid foreclosure, and government agencies should intervene to improve underwriting standards.

No single actor can bring resolution, chairman says
Any meaningful approach to improving the foreclosure rate will entail cooperation among several parties, Bernanke said. Addressing the role government could play in reducing foreclosures, he said the Federal Housing Administration could refinance mortgages that got into arrears. "Realistic public and private sector policies must take into account the fact that traditional foreclosure avoidance strategies may not always work well in the current environment," he said.

At the same time, he proposed that Fannie Mae and Freddie Mac, the government sponsored enterprises (GSEs) that are the biggest sources of money to U.S. mortgage markets, could play a larger role in stemming the rise in foreclosures. He noted that Congress recently authorized the enterprises to securitize larger mortgages and that "now is an especially appropriate time for the GSEs to move quickly to raise significant new capital, which they will need to take advantage of these new securitization and investment opportunities . . . and to do so in a safe and sound manner."

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Map of U.S. subprime mortgagesoff-site image

Lenders should examine principal balances
But Bernanke said solutions extend beyond the role that government could play. He said that lenders—especially in cases where the value of a home has declined significantly below the balance a homeowner owes—should consider reducing the principal of some loans to keep the borrower from falling into 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 of principal or other permanent modification of the loan by the servicer, perhaps combined with a refinancing by the Federal Housing Administration or another lender," he said.


May 16, 2008