Uncle Ben might get the helicopter out yet?

[Jeff Tumbarello]

http://www.bloomberg.com/apps/news?pid=20601068&sid=abINDLzbaE54&refer=home

Dec. 4 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke urged using more taxpayer funds for new efforts to prevent home foreclosures, saying the private sector is incapable of coping with the crisis on its own.

The Fed chief outlined four possible options, including buying delinquent mortgages and providing bigger incentives for refinancing loans. He called for addressing the “apparent market failure†where lenders aren’t modifying mortgages even in cases where it’s in their own economic interest to do so.

Each option would require “some commitment of public funds,†Bernanke said, underscoring his position that the central bank alone can’t revive the economy through its interest- rate cuts and emergency lending programs. The Republican’s stance may also put him in line with President-elect Barack Obama, who said yesterday that “we’ve got to start helping homeowners in a serious way.â€

“More needs to be done,†Bernanke said in a speech to a Fed research conference on housing and mortgage markets in Washington today. “Policy initiatives to reduce the number of preventable foreclosures should be high on the agenda.â€

The government could buy “delinquent or at-risk mortgages in bulk,†then refinance them through the federal Hope for Homeowners program, Bernanke said. Congress could also help reduce loan rates and lender insurance premiums, he said.

Also today, two regional Fed officials warned that the economy, which entered a recession a year ago, faces a lengthy slump.

‘Protracted’ Slump

There will be a “protracted period of poor performance†and policy makers should remain “vigilant†in monitoring risks to growth, Chicago Fed President Charles Evans said in Michigan. Dennis Lockhart, president of the Atlanta Fed, said in New Orleans the yearlong recession is worsening this quarter and the economy will probably be “very weak†throughout next year.

Foreclosures may begin on 2.25 million homes this year, more than double the pace before the financial crisis, he said. Estimates show as many as 20 percent of borrowers may now be “under water,†where their mortgage is bigger than the price of their home, Bernanke said.

“Despite good-faith efforts by both the private and public sectors, the foreclosure rate remains too high, with adverse consequences for both those directly involved and for the broader economy,†Bernanke said.

Market Failure

Some foreclosures are happening “even in cases in which the narrow economic interests of the lender would appear to be better served through modification of the mortgage,†Bernanke said. That is partly the result of packaging loans as securities for sale to investors, where there’s the risk of lawsuits and a lack of “clear guidance,†he said.

While Bernanke supports increasing government efforts on foreclosures, Fed officials have a different position toward the U.S. automakers seeking federal aid of as much as $34 billion.

Fed officials have an aversion to extending the too-big-to- fail doctrine beyond financial institutions. The premise of the central bank’s $85 billion rescue of American International Group Inc. in September was that the insurer’s failure posed a threat to the system through its role in the derivatives market.

Other obstacles involved in lending to carmakers might be finding large pools of collateral for the Fed to loan against. Officials are also unlikely to grant bank holding company status to auto-firm subsidiaries as a potential conduit for aid to the parent. Transactions between banks and affiliates are strictly regulated by the Fed.

‘Downward Spiral’

Until problems are fixed in housing, “we’re going to have at best slow growth,†Robert Eisenbeis, a former Atlanta Fed research director who is now chief monetary economist with Cumberland Advisors, said in an interview with Bloomberg Television. Bernanke is “trying to truncate what he fears will be a downward spiral.â€

Bernanke said a mortgage-guarantee proposal by the Federal Deposit Insurance Corp. has “strengths,†including that the government is involved only if a borrower defaults again. FDIC Chairman Sheila Bair is pressing the Treasury Department to use authority in the $700 billion financial-rescue package to implement the program to spur mortgage modifications.

Another option is to have the government share costs when a loan servicer reduces a borrower’s monthly payment, Bernanke said. While this would put a “greater operational burden on the government†than the FDIC plan, it would “build on, rather than crowd out, private-sector initiatives,†he said.

Scant Response

The Hope for Homeowners program, run by the Federal Housing Administration, has signed up few lenders since it started in October because banks must write off a large portion of the loan and pay high fees. The Fed sits on a board that oversees the program.

Bernanke’s proposed changes would go beyond those announced last month by Housing and Urban Development Secretary Steve Preston, who oversees the FHA. The agency will lower the amount of the loan a lender must forgive, allow banks to extend mortgage terms to 40 years from 30 years and give subordinate holders immediate payment for releasing their liens.

Congress could make the program more attractive by reducing the up-front insurance premium paid by the lender, which is now 3 percent of principal, and the borrower’s 1.5 percent annual premium, Bernanke said.

Lower Rates

Lawmakers should also consider reducing borrowers’ interest rate, which may be near a “quite high†8 percent, he said. That could be accomplished by having the Treasury buy Ginnie Mae securities, or having Congress directly subsidize the rate, Bernanke said.

The Treasury, which already has a program to buy mortgage- backed securities issued by Fannie and Freddie, could step up those purchases to drive down interest rates on some loans to 4.5 percent, a government official said yesterday. The plan is preliminary and could change.

Last week, the Fed also announced a new program aimed at lowering borrowing costs for homebuyers, committing to buy as much as $600 billion of debt issued or backed by government- chartered housing-finance companies Fannie Mae and Freddie Mac.

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The sooner "they" figure out that to get people paying what they can afford instead of all these "clever" ideas, the sooner this will be over. These securities have no intrinsic value except to the" idiots" who made them. I went back to 1988 with the foreclosure data, and did a little digging on who ran the companies that keep popping up, the same guys we are bailing out. One can only hope this is there last "hurrah". If we survive this crash thru inflating our way out, so the next generation can pay the bill. It will be back to the dark ages, when that bill becomes due.