ORLANDO, Florida(Reuters) – Federal Reserve Chairman Ben Bernanke warned on Tuesdaythat mortgage delinquencies and foreclosures are likely to rise, withmore declines in house prices, and called for active measures tostabilize housing markets.
"This situation calls for a vigorous response," Bernanke said in aspeech to the Independent Community Bankers of America, referring togovernment and private-sector initiatives to slow the rate of home loanfailures.
Banks may have to swallow reductions in the principal of sometroubled home loans to ward off greater losses that could result fromoutright default, the Fed chairman said.
"Measures to reduce preventable foreclosures could help not onlystressed borrowers but also their communities and, indeed, the broadereconomy," he said.
U.S. government bond prices shed early losses and turned higher on Bernanke’s comments.
Market bets of a Fed rate cut at its March 18 meeting ticked downslightly to roughly a 66 percent chance of a cut in benchmark interestrates by three-quarters of a percentage point from the current 3percent.
Bernanke’s comments come as the central bank grapples with the twindilemmas of a slowing economy and rising inflation. U.S. economicgrowth slowed to a sluggish 0.6 percent at the end of 2007 and hiringdeclined in January. But inflation rose 4.1 percent in 2007, thelargest 12-month rise since 1990.
Current housing difficulties differ from past housing market slumpsbecause of the large number of homeowners who owe more on their homeloans than their homes are worth, Bernanke said.
"In this environment, principal reductions that restore some equityfor the homeowner may be a relatively more effective means of avoidingdelinquency and foreclosure" than reducing interest rates on troubledhome loans, he said.
When a mortgage is "under water," a reduction in principal may boostthe chances of pay-off by avoiding default or foreclosure, he added.
Analysts said the Fed chairman was advising bankers that it was intheir best interest to resolve mortgage problems quickly and to cuttheir losses.
"The problems in the credit system and problems on consumer balancesheets are such that some of the losses will have to be socialized,either by the market or by the government," said Joseph Brusuelas,chief U.S. economist at IDEAglobal in New York. "And it’s highlypreferable that between the two, those losses be accepted by themarket."
Bernanke also said government-sponsored mortgage finance enterprisesFannie Mae and Freddie Mac could do more to address problems in housingand mortgage markets.
"New capital-raising by the (government-sponsored enterprises),together with congressional action to strengthen supervision of thesecompanies, would allow Fannie and Freddie to expand significantly thenumber of new mortgages that they scrutinize," he said. "With fewalternative mortgage channels today, such action would be highlybeneficial to the economy."
Bernanke added that giving greater latitude to the Federal HousingAdministration to set underwriting standards and risk premiums formortgage refinancing would extend help to more borrowers in trouble.
(Writing by Mark Felsenthal, Editing by Dan Grebler)
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