Bernanke promises homeowner help
WASHINGTON (AP) - March 14, 2008 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."
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.
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
86-year old 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.
To help brace the economy from all the fallout, the Federal
Reserve is expected to cut a key interest rate 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.
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.