Fighting to stem a dangerous wave of home foreclosures, Federal Reserve Chairman Ben Bernanke pledged Friday to do all that is possible to help struggling homeowners.
The Fed is “strongly committed to fully employing our authority, expertise and resources to help alleviate their distress,” Bernanke said in a speech to the National Community Reinvestment Coalition’s annual meeting here.
Record-high foreclosures are aggravating problems in the housing market and for the national economy, which many fear is on the verge of a recession or in one already.
Bernanke didn’t offer new recommendations — as he did earlier this month — but rather spoke of the various steps the Fed already is taking to address current problems and to prevent another crisis of this sort.
The Fed, for instance, has proposed a rule to protect homebuyers from some of the same dubious lending practices that contributed to the housing and credit debacles now shaking the country. Subprime borrowers — those with tarnished credit histories or low incomes — have been hurt the most, although problems have spread to more creditworthy borrowers.
“Far too much of the lending in recent years was neither responsible nor prudent,” Bernanke said. “The terms of some subprime mortgages permitted homebuyers and investors to purchase properties beyond their means, often with little or no equity,” he added. “In addition, abusive, unfair or deceptive lending practices led some borrowers into mortgages that they would not have chosen knowingly.”
At the end of last year, more than one in five of the roughly 3.6 million outstanding subprime adjustable-rate mortgages were seriously delinquent — meaning they were either in foreclosure or 90 days or more past due. That rate is about four times higher than it was in the middle of 2005, he said.
Meanwhile, in 2007, about 45 percent of foreclosures were on prime, near-prime or government-backed mortgages, he added.
The meltdown in the housing and credit markets are not only straining homeowners but also have forced financial companies to rack up multibillion losses. The situation has unhinged Wall Street, put the Federal Reserve and the Bush administration in crisis-management mode, rattled the public and sent politicians — including those vying to be the next president — scrambling for solutions.
Bailing out Bear Stearns Cos.
Underscoring the urgency: Bear Stearns Cos., one of Wall Street’s venerable investment banks, received a rescue package by the Federal Reserve and JPMorgan Chase & Co. on Friday — just hours before Bernanke spoke. It was a last-ditch effort to save the institution.
The Federal Reserve responded swiftly to pleas from Bear Stearns that its coffers had “significantly deteriorated” within a 24-hour period. The bank, which had made a fortune in mortgage-backed securities, has ran up $2.75 billion in write-downs since last year, and faced a possible collapse without some kind of lifeline.
Before launching into his prepared remarks, Bernanke mentioned that he had a “busy morning.” He did not elaborate.
To help brace the economy from all the fallout, the Federal Reserve is expected to cut a key interest rate, now at 3 percent, next week. The debate is whether it will be a half percentage point or an even bigger three-quarter-point reduction. Bernanke, in his speech, did not provide clues on that front.
Instead, the Fed chief’s speech stuck closely to steps the Fed is taking to prevent prospective homebuyers from getting burned in the future when they take out a mortgage.
On this front, the Fed has a proposal that would restrict lenders from penalizing risky borrowers who pay loans off early, require lenders to make sure these borrowers set aside money to pay for taxes and insurance and bar lenders from making loans without proof of a borrower’s income. It also would prohibit lenders from engaging in a pattern or practice of lending without considering a borrower’s ability to repay a home loan from sources other than the home’s value. The proposal also would curtail misleading ads for many types of mortgages and bolster financial disclosures to borrowers.
“The combination of stricter regulation and better disclosure will not solve all the problems,” Bernanke said. “We do believe, however, that this proposal will give consumers much better information,” he added.
‘Strong uniform oversight’
In addition to this effort, Bernanke said a “strong uniform oversight of different types of mortgage lenders is critical to avoiding future problems.”
The housing collapse dragged down home values, clobbering borrowers. Many were left with mortgages that exceeded the value of their homes. They were further socked by low introductory rates on their adjustable mortgages, which then reset to higher rates, making their monthly payments difficult or impossible, to afford.
“For a number of years, rapid increases in house prices effectively insulated lenders and investors from the effect of weaker underwriting, providing false comfort,” Bernanke said.
In a speech earlier this month, Bernanke urged lenders to help distressed homeowners by lowering the amount of their loans. At the time, Bernanke suggested such a longer-term permanent solution may work better than shorter-term and temporary ones, where the distressed homeowner could find himself in trouble again.
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.