![]()
- UAE Central Bank Stands by Banks Amid Dubai Crisis
- Dubai's Nakheel Seeks Suspension $5.25 Billion in Bonds
- Dubai's Debt Woes Signal New Era for Creditors
- US Shoppers Spent Less Over Black Friday: NRF
- US Senator Opposes Fed Chief Bernanke Renomination
- A Weak IPO Debut for Las Vegas Sands' Macau Unit
- US Treasury Wants Banks to Do More to Ease Mortgages
- Tiger Woods Accepts Full Blame for Car Crash
- Next Week: Cash In Now Or Wait For A Santa Rally?
- Tiger Woods Wants to Protect Family Privacy: Agent
- Portfolio Prep for Next Week: 'Don't Get Crazy'
- U.S. Stocks Fall on Dubai Worries
- Black Friday at Best Buy
- Strategists on Dubai: Avoid 'Rash Moves' Now
- Longer Lines, Fuller Carts This Black Friday
- Dubai Stock Market Fear Has 'Legs': Dennis Gartman
- Obama's Emission Reduction Pledge Paints Future for Autos
- Is Super Bowl Halftime Act Too Old?
MOST SHARED
- US Shoppers Spent Less Over Black Friday: NRF
- South Korea Sees Exports Bouncing, but Risks Remain
- UAE Stocks Tumble on Dubai Debt Woes; Asia Rebounds
- Dubai's Nakheel Seeks Suspension $5.25 Billion in Bonds
- Japan Won't Intervene to Weaken Yen: Finance Minister
- Dubai is Harsh Reminder of Prolonged Global Recovery
- Japan Industrial Output Edges Up But Yen May Weigh
The following is the text of a speech by Federal Reserve Chairman Ben Bernanke on Reducing Preventable Mortgage Foreclosures given on March 4, 2008 in Orlando, Florida:
Over the past year and a half, mortgage delinquencies have increased sharply, especially among riskier loans. This development has triggered a substantial and broad-based reassessment of risk in financial markets, and it has exacerbated the contraction in the housing sector. In my remarks today, I will discuss the causes of the distress in the mortgage sector and then turn to the key question of what can be done in this environment to reduce preventable foreclosures.
Although I am aware, as you are, that community banks originated few subprime mortgages, community bankers are keenly interested in these issues; foreclosures not only create personal and financial distress for individual homeowners but also can significantly hurt neighborhoods where foreclosures cluster. Efforts by both government and private-sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done. Community bankers are well positioned to contribute to these efforts, given the strong relationships you have built with your customers and your communities.
The Rise in Mortgage Delinquencies and Foreclosures
Mortgage delinquencies began to rise in mid-2005 after several years at remarkably low levels. The worst payment problems have been among subprime adjustable-rate mortgages (subprime ARMs); more than one-fifth of the 3.6 million loans outstanding were seriously delinquent at the end of 2007.1 Delinquency rates have also risen for other types of mortgages, reaching 8 percent for subprime fixed-rate loans and 6 percent on adjustable-rate loans securitized in alt-A pools. Lenders were on pace to have initiated roughly 1-1/2 million foreclosure proceedings last year, up from an average of fewer than 1 million foreclosure starts in the preceding two years.2 More than one-half of the foreclosure starts in 2007 were on subprime mortgages.
The recent surge in delinquencies in subprime ARMs is closely linked to the fact that many of these borrowers have little or no equity in their homes. For example, data collected under the Home Mortgage Disclosure Act suggest that nearly 40 percent of higher-priced home-purchase loans in 2006 involved a second mortgage (or "piggyback") loan. Other data show that more than 40 percent of the subprime loans in the 2006 vintage had combined loan-to-value ratios in excess of 90 percent, a considerably higher share than earlier in the decade.3 Often, in recent mortgage vintages, small down payments were combined with other risk factors, such as a lack of documentation of sufficient income to make the required loan payments.
This weak underwriting might not have produced widespread payment problems had house prices continued to rise at the rapid pace seen earlier in the decade. Rising prices provided leveraged borrowers with significant increases in home equity and, consequently, with greater financial flexibility. Instead, as you know, house prices are now falling in many parts of the country. The resulting decline in equity reduces both the ability and the financial incentive of stressed borrowers to remain in their homes. Indeed, historically, borrowers with little or no equity have been substantially more likely than others to fall behind in their payments. The large number of outstanding mortgages with negative amortization features may exacerbate this problem.
Delinquencies and foreclosures likely will continue to rise for a while longer, for several reasons. First, supply-demand imbalances in many housing markets suggest that some further declines in house prices are likely, implying additional reductions in borrowers' equity. Second, many subprime borrowers are facing imminent resets of the interest rates on their mortgages. In 2008, about 1-1/2 million loans, representing more than 40 percent of the outstanding stock of subprime ARMs, are scheduled to reset. We estimate that the interest rate on a typical subprime ARM scheduled to reset in the current quarter will increase from just above 8 percent to about 9-1/4 percent, raising the monthly payment by more than 10 percent, to $1,500 on average. Declines in short-term interest rates and initiatives involving rate freezes will reduce the impact somewhat, but interest rate resets will nevertheless impose stress on many households.
In the past, subprime borrowers were often able to avoid resets by refinancing, but currently that avenue is largely closed. Borrowers are hampered not only by their lack of equity but also by the tighter credit conditions in mortgage markets. New securitizations of nonprime mortgages have virtually halted, and commercial banks have tightened their standards, especially for riskier mortgages. Indeed, the available evidence suggests that private lenders are originating few nonprime loans at any terms.
This situation calls for a vigorous response. Measures to reduce preventable foreclosures could help not only stressed borrowers but also their communities and, indeed, the broader economy. At the level of the individual community, increases in foreclosed-upon and vacant properties tend to reduce house prices in the local area, affecting other homeowners and municipal tax bases. At the national level, the rise in expected foreclosures could add significantly to the inventory of vacant unsold homes--already at more than 2 million units at the end of 2007--putting further pressure on house prices and housing construction.
- These four sectors will be the next to lead the market.
- Zhu Zhu Pets are this year's must-have toy, fetching $40 or more on eBay.
- From the why-didn’t-I-think-of-that file, we present Jason Sadler, a man whose job is wearing T-shirts.
- It may be the most unusual guide to business you'll read.
- Shopping for a gadget hound? The choices can be baffling. Here are a few that should be a hit.
- "The Who" will be the halftime act for Super Bowl XLIV on Feb. 7 in Miami. Is the NFL behind the times?











