U.S. Federal Reserve Chairman Ben Bernanke warned Tuesday that a mortgage crisis in the country is likely to continue, and called on lenders to help home owners by adjusting their loan terms. “This situation calls for a vigorous response,” Bernanke said in a speech to a banking group meeting in Orlando, Florida. The Fed chief said efforts currently underway would help, but that foreclosures and late payments on home mortgages are likely to rise “for a while longer.” “Reducing the rate of preventable foreclosures would promote economic stability for households, neighborhoods and the nation as a whole,” Bernanke said. “Although lenders and servicers have scaled up their efforts and adopted a wider variety of loss-mitigation techniques, more can, and should, be done,” he said. Among his suggestions was that lenders consider reducing the amount of some loans. “Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure,” Bernanke said. He acknowledged that lenders would be understandably reluctant to write off debt, but warned that the solution may be the only way to avoid foreclosures or defaults. “Measures that lead to a sustainable outcome are to be preferred to temporary palliatives, which may only put off foreclosure and perhaps increase its ultimate costs,” Bernanke said. More than half of the projected 1.5 million home foreclosure proceedings started in 2007 were on subprime loans given to borrowers with poor credit histories or low incomes. Around 1.5 million loans are scheduled to reset to higher interest rates this year, Bernanke said. The Fed estimates that rise in interest rates on a typical subprime adjustable rate mortgage will push the average monthly payment up more than 10 percent. Declines in short-term interest rates and a Bush administration initiative involving rate freezes will “reduce the impact somewhat, but interest rate resets will nevertheless impose stress on many households,” Bernanke said.
