Fed's Krosner says new methods needed to cope with new foreclosure wave

WASHINGTON (Thomson Financial) - The Federal Reserve considers the nation's high and rising foreclosure rate an "urgent problem," Governor Randall Kroszner said today, and non-traditional remedies are needed to help the homeowners with non-traditional mortgages and financial problems who dominate the foreclosure statistics.

"High loan-to-value ratios at origination, combined with stagnant and eventually declining home prices, are a key aspect of the recent rise in delinquencies and foreclosures," Krosner said in a speech prepared for the NeighborWorks Training Insititute in Cincinnati.

He made no comments on the state of the economy or monetary policy.

More than 40% of subprime loans in 2006 had loan-to-value ratios above 90% and many mortgage originators indulged in "risk-layering," Krosner said. Risk layering is adding piggyback loans, negative amortization and other features the industry called "non-traditional" or "exotic" to enable a would-be buyer to get a loan.

"Taken individually, these risk factors may not have significantly raised the likelihood that a homeowner would fall behind on payments; taken together, however, these risks materially increased this likelihood," Kroszner said.

Combine the high loan-to-value ratios with falling prices and homeowners saw what little equity they had disappear, and with it their ability to refinance into a more sustainable mortgage and their incentive to try to stay in their homes.

Krozner cited research by the Boston Fed showing a homeowners who had seen a 20% or greater fall in house prices were 14-times more likely to default than owners who had seen a 20% increase.

Traditional refinancing is no longer an option in many such cases and, echoing Fed Chairman Ben Bernanke, Kroszner said the Fed is urging lenders to pursue non-traditional ways of avoiding foreclosures.

"Temporary adjustments to payments may not be sufficient," he said, "and more-permanent reductions in interest rates or an extension of the loan term may be required to help the borrower. In some situations, lenders and servicers may want to consider using principal writedowns to reduce re-default risk or to facilitate a refinancing." Kroszner said the Fed is also using its national and regional-bank resources to provide local governments and non-profit housing organizations with data on high-foreclosure areas and training in strategies to prevent high numbers of foreclosures and vacant homes from blighting communities.

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