Bernanke Calls Out For More Action to Halt Foreclosures

The chairperson of the Federal Reserve Ben Bernanke has called out for more action to halt the forward march of foreclosures. Lenders are noting that in all probability this year the foreclosure numbers will touch 2.25 million. During the pre-crisis days the annual number was on an average 1 million.

Although many steps have been taken to address this problem reo homes numbers continue to remain “too high” with negative repercussions on house owners, lenders and the broad economy. Bernanke was talking at a Fed conference focusing on housing finance. Bernanke said, “More needs to be done.”Bernanke outlined additional relief measures, which he termed “promising options” that would reduce sizably the number of avoidable foreclosures.

He asked the Congress to make easy the terms of the government measure termed Hope for Homeowners. It allows foreclosure victims to refinance into new mortgages with easier terms. These are moreover federally insured. The principal however has to be lowered and an upfront insurance premium paid by the lender. Bernanke’s suggestion was the upfront insurance premium as well as the interest rate be lowered. The rate of 8% was too high.

The second option was the lowering of the loan modification terms that had been put forward by FDIC and made more realistically affordable. FDIC had applied this plan when it took over IndyMac earlier in the current year. Under this plan the foreclosure victims of IndyMac paid 3% interest for a period of five years. The rates were reduced so as to see that the borrower was not paying more than 38% of pre-tax income towards house mortgage. Bernanke proposed that this could be brought down to 31%. In both options the government would be sharing some of the additional costs.

As a third alternative Bernanke proposed that the government could make bulk purchases of delinquent or risky mortgages and then refinance them through Hope for Homeowners or similar other government programmes.

Bernanke also suggested that a wider push from lenders to forgive parts of the house loans fore some borrowers and making permanent modifications would go a long way in saving the critical situation.

Wall Street investors were not happy with these proposals and the Dow Jones tumbled by over 215 points. The foreclosure related crisis has forced financial companies to accept huge losses on mortgage investments that had turned sour. It is the worst crisis since the time of the Great Depression.