Bernanke: Fed Will Act To Curb Fallout of Credit Ills

Late Payments Spiking

Foreclosures are at record highs and late payments are spiking. Lenders have been forced out of business and investors have taken huge financial hits. Lax lending standards during the housing boom came to roost after the housing bust.

Lawmakers in Congress and administration officials have been scrambling to curb the fallout. The carnage has been the worst, with "subprime" mortgages held by borrowers with spotty credit or low incomes. Many are at risk of losing their homes.

Analysts estimate that at least 2 million adjustable-rate mortgages will jump from very low initial teaser rates to higher rates this year and next. Steep prepayment penalties have made it difficult for some to get out of their mortgages. Some overstretched homeowners can't afford to refinance or even sell their homes.

Addressing the larger issue of bad lending practices, Rep. Spencer Bachus, R-Ala., said: "There is general agreement that abuses have occurred in the subprime market. There is widespread agreement that these are practices that should not be tolerated."

To help struggling homeowners, proposals in Congress would expand federal backing of mortgages. The House on Tuesday passed legislation that would give more leeway to the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers. The Senate has its own bill. The administration, meanwhile, is working with the FHA to help squeezed homeowners.

"Foreclosure Isn't Good"

"Foreclosure isn't good for anyone," said Alphonso Jackson, secretary of Housing nd Urban Development, urging lawmakers to move quickly on FHA reform.

There's been a big debate in Washington about how Fannie Mae and Freddie Mac could help out. The government on Wednesday nudged up their investment caps, a move aimed at alleviating stress in the mortgage market.

For its part, the Federal Reserve is conducting a thorough review of possible actions to help consumers and would-be homeowners and prevent problems from recurring. Bernanke said the Fed is committed to providing more effective disclosures to help consumers defend against improper lending.

The Fed also is considering new rules in several areas, including restrictions on loans that don't require proof of a borrower's income and limitations on financial penalties for borrowers who make early payments.

Bernanke said more uniform enforcement in the fragmented market of brokers and lenders also would help protect consumers.