Fed Urges Lenders To Forgive Portions Of Mortgages

The chairman of the Federal Reserve, Ben Bernanke, battling the worst housing recession in a quarter century, urged lenders to forgive portions of mortgages held by homeowners at risk of defaulting. "Efforts by both government and private-sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done," Mr. Bernanke said in a speech to bankers in Orlando, Fla., yesterday. "Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure."

Mr. Bernanke's call goes beyond the stance of the Bush administration and previous Fed comments, indicating that he sees housing as a serious threat to the economy that can't be addressed by fiscal or monetary policy alone. The Fed's February 27 report to Congress called for lenders to "pursue prudent loan workouts" through means such as modifying mortgage terms and deferring payments.

The Fed chief highlighted the threat posed by home values falling below mortgage balances, something Treasury Secretary Henry Paulson played down yesterday. Mr. Bernanke said the "recent surge" in delinquencies has been "closely linked" to the slide of home equity. Mr. Paulson said in an interview with Bloomberg Television yesterday that "almost too much" has been made out of concerns about homeowners whose house prices have dropped below their mortgages. He also said the administration's strategy of encouraging lenders to modify loans is "the right approach and we are making substantial progress."