Fed Chair Ben Bernanke speaking today at a Fed housing conference in Washington, D.C., urged the government to consider doing more to prevent foreclosures. After emphasizing the continued deterioration in the value of mortgage securities and the resulting increase in uncertainty about the value of a much larger amount of financial assets exposed to that risk, contributing substantially, in turn, to the weakening of economic activity – Mr. Bernanke implied – that since the housing and mortgage markets are directly and tightly interlinked with the rest of the economy, the government at this point should do more and consider sweeping steps to prevent foreclosures, including buying risky mortgages and refinancing them under more favorable terms to homeowners.
….as the economy has slowed and unemployment has risen, more households are finding it difficult to make their mortgage payments. About 4-1/2 percent of all first-lien mortgages are now more than 90 days past due or in foreclosure, and one in ten near-prime mortgages in alt-A pools and more than one in five subprime mortgages are seriously delinquent. Lenders appear to be on track to initiate 2-1/4 million foreclosures in 2008, up from an average annual pace of less than 1 million during the pre-crisis period.
The Fed chair also cited estimates showing as many as “15% to 20% mortgages may be under water,” meaning more is owed on the house than it is actually worth.
If one accepts the view that principal write-downs may be needed in cases of badly underwater mortgages, then strengthening the H4H program is a promising strategy… Beyond the steps already taken by the H4H board, the Congress might consider making the terms of H4H loans more attractive by reducing the up-front insurance premium paid by the lender, currently set in law at 3 percent of the principal value, as well as the annual premium paid by the borrower, currently set at 1-1/2 percent. The Congress might also grant the FHA the flexibility to tailor these premiums to individual risk characteristics rather than forcing the FHA to charge the same premium to all borrowers.
In addition, consideration might be given to reducing the interest rate that borrowers would pay under the H4H program. At present, this rate is expected to be quite high, roughly 8 percent, in part because it is tied to the demand for the relatively illiquid securities issued by Ginnie Mae to fund the program. To bring down this rate, the Treasury could exercise its authority to purchase these securities, with the Congress providing the appropriate increase in the debt ceiling to accommodate those purchases. Alternatively, the Congress could decide to subsidize the rate.
Mr. Bernanke also outlined an additional step the government can take:
Yet another promising proposal for foreclosure prevention would have the government purchase delinquent or at-risk mortgages in bulk and then refinance them into the H4H or another FHA program.
The Fed chief concluded by saying that “reducing the number of preventable foreclosures would not only help families stay in their homes, it would confer much wider benefits. Significant efforts have been taken in this direction, but more needs to be done“.