Tuesday, March 4, 2008

Bernanke Urges Lenders to Increase Writedowns of U.S. Mortgages

Bernanke Urges Lenders to Increase Writedowns of U.S. Mortgages

By Scott Lanman and Steve Matthews

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Federal Reserve Chairman Ben S. Bernanke urged lenders to expand mortgage writedowns for borrowers whose home values have declined, saying more must be done to stem foreclosures.

``Efforts by both government and private-sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done,'' Bernanke said in remarks prepared for a conference in Orlando, Florida. ``Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.''

Bernanke's remarks go beyond the stance of the Bush administration and previous Fed comments. By comparison, the central bank's Feb. 27 report to Congress called for lenders to ``pursue prudent loan workouts'' through means such as modifying mortgage terms and deferring payments.

``Delinquencies and foreclosures likely will continue to rise for a while longer,'' Bernanke said in the comments to the Independent Community Bankers of America. ``Supply-demand imbalances in many housing markets suggest that some further declines in house prices are likely.''

In addition, borrowers with subprime mortgages are about to see their interest rates increase by more than 1 percentage point, he said. ``Declines in short-term interest rates and initiatives involving rate freezes will reduce the impact somewhat, but interest-rate resets will nevertheless impose stress on many households,'' Bernanke said.

Interest Rates

Bernanke didn't comment in his speech text on the outlook for the economy or interest rates. Traders expect the Federal Open Market Committee to lower the benchmark rate by 0.75 percentage point by or at the panel's next meeting on March 18, based on futures prices.

Bernanke signaled in congressional testimony last week that the Fed is prepared to lower rates again even amid signs of accelerating inflation.

Yesterday, the Fed and other regulators sent letters to institutions they supervise, encouraging the banks to report on their efforts to modify mortgages at risk of default.

``This will make it easier for regulators, the mortgage industry, lawmakers and homeowners to assess the effectiveness of these efforts,'' Fed Governor Randall Kroszner said in a statement yesterday.

Fed Vice Chairman Donald Kohn is testifying today with other banking regulators before the Senate Banking Committee in Washington.

Foreclosures Climb

The number of U.S. homeowners entering foreclosure rose 75 percent in 2007, with more than 1 percent in some stage of foreclosure during the year, according to RealtyTrac Inc. of Irvine, California. For the year, more than 2.2 million default notices, auction notices and bank repossessions were reported on about 1.3 million properties.

``Lenders tell us that they are reluctant to write down principal,'' Bernanke said. ``They say that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again.''

The Fed chairman countered that by reducing the amount of the loan, this ``may increase the expected payoff by reducing the risk of default and foreclosure.''

Bernanke spoke in a state that's among the worst affected by the housing collapse. Miami home prices have dropped 17.5 percent in the past year, the most of 20 large U.S. cities, according to the S&P/Case-Shiller index. Foreclosures in Florida jumped at more than double the nationwide pace, rising 158 percent in the past year, according to RealtyTrac.

Call to Investors

The Fed chief also urged investors in mortgage bonds to accept ``short payoffs'' of loans by allowing borrowers to refinance at a lower principal.

For investors, a reduction in principal that's ``sufficient to make borrowers eligible for a new loan would remove the downside risk to investors of additional writedowns or a re- default,'' Bernanke said. Original investors may be able to share in future gains in home prices under some plans, he said, citing a proposal by the Office of Thrift Supervision.

Last week, the Bush administration and congressional leaders sharpened their rhetoric over Democratic proposals to help stem foreclosures.

Representative Barney Frank of Massachusetts on Feb. 28 outlined a $15 billion plan to buy distressed mortgages from lenders, saying the ``cascade of foreclosures will continue'' without government action. Treasury Secretary Henry Paulson said such proposals ``do more harm than good.''

The administration is advocating a voluntary, industry- driven approach that urges the loan-servicing companies to modify mortgages for struggling borrowers.

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