The following is the full text of U.S. Federal Reserve Chairman Ben Bernanke's "Housing, Mortgage Markets and Foreclosures" speech issued in Washington Thursday and delivered before before the Fed conference on Housing and Mortgage Markets:
"The U.S. financial system has been in turmoil during the past 16 months. Credit conditions have tightened and asset values have declined, contributing substantially, in turn, to the weakening of economic activity. As the participants in this conference are keenly aware, I am sure, housing and housing finance played a central role in precipitating the current crisis. As the crisis has persisted, however, the relationships between housing and other parts of the economy have become more complex. Declining house prices, delinquencies and foreclosures, and strains in mortgage markets are now symptoms as well as causes of our general financial and economic difficulties. These interlinkages imply that policies aimed at improving broad financial and economic conditions and policies focused specifically on housing may be mutually reinforcing.
Indeed, the most effective approach very likely will involve a full range of coordinated measures aimed at different aspects of the problem.
I will begin this morning with some comments on developments in the housing sector and on the interactions among house prices, mortgage markets, foreclosures, and the broader economy. I will then discuss both some steps taken to date and some additional measures that might be taken to support housing and the economy by reducing the number of avoidable foreclosures. As we as a nation continue to fashion our policy responses in coming weeks and months, we must draw on the best thinking available. I expect that the papers presented at this conference will add significantly to our understanding of these important issues.
Developments in Housing and Housing Finance As you know, the current housing crisis is the culmination of a large boom and bust in house prices and residential construction that began earlier in this decade. Home sales and single-family housing starts held unusually steady through the 2001 recession and then rose dramatically over the subsequent four years. National indexes of home prices accelerated significantly over that period, with prices in some metropolitan areas more than doubling over the first half of the decade.1 One unfortunate consequence of the rapid increases in house prices was that providers of mortgage credit came to view their loans as well-secured by the rising values of their collateral and thus paid less attention to borrowers' ability to repay.
However, no real or financial asset can provide an above-normal market return indefinitely, and houses are no exception. When home-price appreciation began to slow in many areas, the consequences of weak underwriting, such as little or no documentation and low required down payments, became apparent. Delinquency rates for subprime mortgages—especially those with adjustable interest rates—began to climb steeply around the middle of 2006. When house prices were rising, higher-risk borrowers who were struggling to make their payments could refinance into more-affordable mortgages. But refinancing became increasingly difficult as many of these households found that they had accumulated little, if any, housing equity. Moreover, lenders tightened standards on higher-risk mortgages as secondary markets for those loans ceased to function.
Higher-risk mortgages are not the only part of the mortgage market to have experienced stress. For example, while some lenders continue to originate so-called jumbo prime mortgages and hold them on their own balance sheets, these loans have generally been available only on more restrictive terms and at much higher spreads relative to prime conforming mortgage rates than before the crisis. Mortgage rates in the prime conforming market—although down somewhat from their peaks—remain high relative to yields on longer-term Treasury securities, and lending terms have tightened for this segment as well.
As house prices have declined, many borrowers now find themselves "under water" on their mortgages—perhaps as many as 15 to 20 percent by some estimates. In addition, 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.
Predictably, home sales and construction have plummeted. Sales of new homes and starts of single-family houses are now running at about one-third of their peak levels in the middle part of this decade. Sales of existing homes, including foreclosure sales, are now about two-thirds of their earlier peak.
Notwithstanding the sharp adjustment in construction, inventories of unsold new homes, though down in absolute terms, are close to their record high when measured relative to monthly sales, suggesting that residential construction is likely to remain soft in the near term.
As I mentioned earlier, the problems in housing and mortgage markets have become inextricably intertwined with broader financial and economic developments. For example, mortgage-related losses have eroded the capital of many financial institutions, leading them to become more reluctant to make not only mortgage loans, but other types of loans to consumers and businesses as well. Likewise, some homeowners have responded to declining home values by cutting back their spending, and residential construction remains subdued. Thus, weakness in the housing market has proved a serious drag on overall economic activity. A slowing economy has in turn reduced the demand for houses, implying a further weakening of conditions in the mortgage and housing markets.