Financial Update (First Quarter 2009)

Fed Gov. Duke: Policymakers Must Address Rising Costs of Foreclosures

photo of Federal Reserve Governor Elizabeth Duke

More needs to be done to encourage lenders and mortgage borrowers to modify loan terms to prevent foreclosures, Federal Reserve Gov. Elizabeth Duke said in a Feb. 11 speech on stabilizing the nation's housing markets.

Congress or the government might consider reducing the interest rate paid by borrowers through the "HOPE for Homeowners" program, either by direct subsidy or U.S. Treasury purchases of the Ginnie Mae securities to which the borrowers' interest rate is tied, Duke suggested. She also said government funds might be used to offer some general inducement for servicers to modify loans at risk of default. Her speech came one week before President Obama unveiled his administration's proposals to combat rising foreclosures.

Speech transcript off-site image
Gov. Duke bio off-site image
HOPE for Homeowners program off-site image

Lenders should consider options
Speaking at the Global Association of Risk Professionals' Risk Management Convention in New York City, Duke also noted that if foreclosed properties appear likely to sit vacant for a long time and thus hurt the surrounding neighborhood, the lender might consider selling the properties to, or entering partnerships with, responsible third-party groups such as local governments or nonprofits.

Meanwhile, Duke stressed the importance of reducing the costs associated with foreclosures that cannot be prevented. "We are likely only beginning to see the serious costs of the foreclosures that have already been initiated," she said, "both because of the often-substantial amount of time required to complete a foreclosure and because the costs likely compound as the number of foreclosures grows larger."

Gov. Duke Urges Bankers to Help Stabilize Housing Markets

Federal Reserve Board Gov. Elizabeth Duke also addressed the troubled housing markets in a Feb. 16 speech to the American Bankers Association's national conference for community bankers in Phoeniz, Ariz.

Text of speechoff-site image

"Far greater attention" needed
Duke said that "far greater attention" from policymakers and banks needs to be paid to restoring the health of the housing market, specifically addressing the need to reduce preventable foreclosures. "Such efforts are not only in the interest of the families who are directly affected and their immediate communities but are also in the interest of the financial institutions involved and the broader economy," she said.

Duke divided homeowners into three broad categories: distressed homeowners who can avoid foreclosure with a loan modification, homeowners who are unable or unwilling to sustain their mortgage payments even with loan modification, and those homeowners who are successfully meeting their mortgage obligations.

Of the latter group, she said, "One might be tempted to view these households as a lesser concern, but we must be mindful that they will be more likely to shift into one of the distressed groups if we do not reduce both the number of foreclosures and the cost of the foreclosures that do occur."

Stabilizing housing markets central to broader economy's health
Duke linked the normalizing of the housing sector to restoration of the overall economy. "Such efforts are not only in the interest of the families who are directly affected and their immediate communities but are also in the interest of the financial institutions involved and the broader economy," she said. "Because much of the cost does not occur as soon as a foreclosure has been initiated and can grow with time, we must for forward-looking and affirmatively engage in efforts to mitigate the consequences now."

Describing a host of housing ills
Duke also discussed the depth of the problems plaguing the nation's housing sector:

  • Signs point to the housing weakness persisting, as new household formations have been falling short of expectations. One reason is that younger people facing a difficult job market are delaying leaving their parents' homes.

  • The latest data, based on information from FirstAmerican CoreLogic, show 25 percent of subprime loans and 13 percent of near-prime loans are seriously delinquent or more than 90 days past due or in foreclosure. Three to 4 percent of prime mortgages are seriously delinquent, a rate that has nearly doubled in the past year.

  • Lenders initiated 2.25 million foreclosures in 2008, more than double the number of 2006.

  • Traditionally, about half of foreclosures result in the owner losing the home. That percentage could well be higher now because of the large number of distressed households and the weak economy.

February 26, 2009