Bernanke Says Government Must Step Up Efforts on Foreclosures

By Scott Lanman

Dec. 4 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the U.S. government must step up efforts to prevent home foreclosures, with options including buying delinquent mortgages and providing bigger incentives for refinancing loans.

The government could buy “delinquent or at-risk mortgages in bulk,” then refinance them through the federal Hope for Homeowners program, Bernanke said in a speech at a Fed conference in Washington. Congress could also help reduce loan rates and lender insurance premiums, he said.

Each option would require “some commitment of public funds,” Bernanke said, underscoring his position that the central bank alone can’t revive the economy through its interest- rate cuts and emergency lending programs. Foreclosures may begin on 2.25 million homes this year, more than double the pace before the financial crisis, he said.

“More needs to be done,” Bernanke said in prepared remarks to the Fed research conference on housing and mortgage markets. “Policy initiatives to reduce the number of preventable foreclosures should be high on the agenda.”

Bernanke said a loan-guarantee proposal by the Federal Deposit Insurance Corp. has “strengths,” including that the government is involved only if a borrower defaults again. FDIC Chairman Sheila Bair is pressing the Treasury Department to use authority in the $700 billion financial-rescue package to implement the program to spur mortgage modifications.

Cutting Payments

Another option is to have the government share costs when a loan servicer reduces a borrower’s monthly payment, Bernanke said. While this would put a “greater operational burden on the government” than the FDIC plan, it would “build on, rather than crowd out, private-sector initiatives,” he said.

The Hope for Homeowners program, run by the Federal Housing Administration, has signed up few lenders since it started in October because banks must write off a large portion of the loan and pay high fees. The Fed sits on a board that oversees the program.

Bernanke’s proposed changes would go beyond those announced last month by Housing and Urban Development Secretary Steve Preston, who oversees the FHA. The agency will lower the amount of the loan a lender must forgive, allow banks to extend mortgage terms to 40 years from 30 years and give subordinate holders immediate payment for releasing their liens.

Congress could make the program more attractive by reducing the up-front insurance premium paid by the lender, which is now 3 percent of principal, and the borrower’s 1.5 percent annual premium, Bernanke said.

Buying Securities

Lawmakers should also consider reducing borrowers’ interest rate, which may be near a “quite high” 8 percent, he said. That could be accomplished by having the Treasury buy Ginnie Mae securities, or having Congress directly subsidize the rate, Bernanke said.

Last week, the Fed announced a new program aimed at lowering borrowing costs for homebuyers, committing to buy as much as $600 billion of debt issued or backed by government- chartered housing-finance companies Fannie Mae and Freddie Mac.

Separately, Treasury Secretary Henry Paulson is considering a new plan to reduce borrowing rates involving the purchase of mortgage-backed securities issued by Fannie and Freddie, a government official said yesterday.

The Treasury, which already has a program to buy the securities, could step up those purchases to drive down interest rates on some loans to 4.5 percent, the official said on condition of anonymity. The plan is preliminary and could change.

Bush Faulted

The Bush administration has been faulted by Democrats and consumer advocates for failing to take sufficient steps to stem record home-loan foreclosures this year. Federal Housing Finance Agency Director James Lockhart has been prodding private mortgage servicers and bond investors to cooperate with government efforts to modify or refinance loans for troubled borrowers.

Yesterday, the Fed’s Beige Book regional-business survey said residential real estate was running at a “slow pace” across the country, with sales down in most districts.

New-home sales in the U.S. fell in October to the lowest level in 17 years, the Commerce Department said last week, as the credit crunch deprived potential buyers of needed financing. Sales of new homes were down 40 percent from a year ago.

“Residential construction is likely to remain soft in the near term” given high inventories of unsold new homes, Bernanke said today.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.