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March 5, 2008

Fed chief says banks should do more

Federal Reserve Chairman Ben Bernanke said the deepening U.S. housing downturn requires a "vigorous" response and urged the financial industry to reduce mortgage balances for many strapped borrowers who owe more than their home is worth.

"Reducing the rate of preventable foreclosures would promote economic stability for households, neighborhoods and the nation," Bernanke said. "More can, and should, be done."

Bernanke's statements signal rising concern that voluntary industry efforts aren't keeping pace with rising foreclosures, particularly among high-cost subprime loans. A Treasury Department-backed industry group, Hope Now, has aided more than a million borrowers since July. In most cases, lenders stretched out payment plans, rather than modifying loans.

Treasury Secretary Henry Paulson, in an interview with USA TODAY on Tuesday, said cutting loan principal might be appropriate in some cases but didn't endorse the idea as a general approach. He reiterated his opposition to any government-funded housing bailout.

"Financial institutions have the incentive to work something out," Paulson said. "In some instances, they may come to the conclusion that it is less costly to write down principal than to go through a foreclosure."

Bernanke told a bankers meeting in Orlando that reducing balances might be more effective than other measures in avoiding foreclosure.

Many buyers, in the past several years, took out mortgages that required little money down. Homeowners could hold on while escalating property values boosted their home equity. But Moody's Economy.com notes borrowers now face a situation where prices are down 10 percent from recent peaks and still falling. The firm estimates that by the end of March, 8.8 million homeowners will have mortgage balances that equal or exceed the value of the property.

In a statement after Bernanke's speech, the Mortgage Bankers Association said some borrowers don't have the credit quality or motivation to work out their troubled mortgages. More than 40 percent of loans now in foreclosure were with borrowers who have abandoned the property or were absentee investors, according to MBA.

"It is not a casual thing to disrupt an existing legal contract, (but) there is an incentive for lenders, borrowers and investors to work together," said MBA CEO Jonathan Kempner.

The rate on a typical subprime mortgage this quarter will rise to 9.25 percent from about 8 percent, the Fed says.

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