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High Foreclosure Rates Hurt Broad Economy: Bernanke

Federal Reserve Chairman Ben Bernanke on Monday said conditions in mortgage markets remain strained, posing a threat to the economy, and urged steps be taken to prevent home foreclosure where possible.

Federal Reserve Chairman Ben Bernanke.
Mary Altaffer
Federal Reserve Chairman Ben Bernanke.

"High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets, and the broader economy," Bernanke said in remarks prepared for delivery to the Columbia University School of Business in New York.

Bernanke said the sharp U.S. housing downturn is producing a steep rise in mortgage delinquencies. Not all foreclosures result in the loss of the home, he said, but the high number of borrowers in distress and sharp declines in home values in regions of the country mean the share of people who lose their homes will be higher in the current situation than in the past.

A widespread decline in home prices is a relatively novel phenomenon, and lenders and loan servicers will have to develop new and flexible strategies to deal with this issue, the Fed chairman said.

Bernanke called on Congress to move quickly on legislation expanding the Federal Housing Administration and strengthening oversight of government-sponsored mortgage finance enterprises Fannie Mae and Freddie Mac.

"Finding ways to avoid preventable foreclosures is a legitimate and important concern of public policy," he said.

Bernanke's comments come as a sharp spike in problem U.S. home loans and a deep correction in U.S. housing markets have led to financial market turmoil and weighed on U.S. economic growth to the point that many analysts believe it is in recession.

A congressional panel last week passed a sweeping bill to enable the government to finance $300 billion in distressed mortgages. Its authors say the measure would help 2 million homeowners avoid foreclosure.

The Bush administration opposes the measure, saying it exposes taxpayers to potentially significant losses if a large share of loans refinanced by the government fail.

Bernanke stopped well short of endorsing the bill in his speech, saying only that Congress should pass a legislation that would give the Federal Housing Administration greater latitude to set underwriting standards and risk-based premiums for mortgage refinancing.

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