Wednesday, May 7, 2008

Mortgage crisis 'threat to economy'

Mortgage crisis 'threat to economy'

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Ben Bernanke, chairman of the US central bank, has said that the rising cases of late mortgage payments and home foreclosures pose considerable dangers to the US economy.

In a speech on Monday, he urged congress to take additional steps to alleviate the problems.

"High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets and the broader economy," Bernanke said in a dinner speech at Columbia Business School in New York.

"Therefore, doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It's in everybody's interest."

Bernanke did not talk about the interest-rate policy or the state of the economy.

'More relief'

On April 30th the Federal Reserve cut a key interest rate by one-quarter percentage point to two per cent and strongly hinted that it may take a break in its rate-cutting campaign that started last September.

To provide more relief, Bernanke again called on congress to give the Federal Housing Administration, which insures mortgages, more flexibility to help distressed borrowers at risk of losing their homes.He urged legislators to move ahead on legislation revamping Fannie Mae and Freddie Mac, which finance mortgages. And he called on the two mortgage giants to quickly raise new capital.

Some 1.5 million US homes entered into the foreclosure process last year, up 53 per cent from 2006, Bernanke said.

The rate of new foreclosures looks likely to be even higher this year, he said.

"Conditions in mortgage markets remain quite difficult," Bernanke said.

The reasons behind surging late payments and foreclosures can vary and that needs to be taken into account when developing solutions, he said.

For instance, parts of New England, states in the Great Lakes, including Minnesota, Michigan and Wisconsin, show increased mortgage delinquencies and "notable increases" in unemployment rates, Bernanke said.

California, Florida and parts of Colorado, on the other hand, saw delinquencies rise during a period when unemployment generally decreased but the value of homes declined, he said.

The current housing crisis has affected some borrowers home prices, leaving them with mortgages that are bigger than the value of their homes.

When that's the primary problem, Bernanke said, the best solution may be reducing the amount that the borrower owes on the loan or some other permanent modification to the loan.

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