Ben Says It Like It Is

Posted by: Chris Palmeri on March 4, 2008

benanke.jpg

Fed Chief Ben Bernanke has been criticized for shifting course a bit too much, raising interest rates, then lowering them, and not moving swiftly to address the housing crisis. But his speech today before community bankers in Orlando shows he’s really a breath of fresh air compared to his predecessor Alan Greenspan.

Bernanke lays out the problem very succinctly.

“The recent surge in delinquencies in subprime ARMs is closely linked to the fact that many of these borrowers have little or no equity in their homes,” he said. “Small down payments were combined with other risk factors, such as a lack of documentation of sufficient income to make the required loan payments.”

As Bernanke sees it “delinquencies and foreclosures likely will continue to rise for a while longer.” He’s forecasting further declines in home prices. In 2008, he said, about 1.5 million loans—representing more than 40% of the outstanding subprime ARMs—are scheduled to reset at rates around 9.25%.


Bernanke is looking for free market solutions to the problem, while still plunging in to help. He says the Fed has been sharing its data with consumer groups who then host information workshops and distribute available funds to help homeowners in trouble. New FHA loan programs will allow some borrowers to refinance. Bernanke is calling on lenders and mortgage securities investors to renegotiate problem loans or to let borrowers out from under them.

Bernanke said the number of such subprime mortgage workouts rose from around 250,000 in the third quarter of 2007 to 300,000 in the fourth quarter, while workouts of prime mortgages rose from 150,000 to 175,000 over the same period. The pace picked up more in January.

“Reducing the rate of preventable foreclosures would promote economic stability for households, neighborhoods, and the nation as a whole,” he said. “Although lenders have scaled up their efforts, more can, and should, be done.”

Reader Comments

Michael Freeman

March 6, 2008 2:55 AM

I agree, it was comforting to know he "gets it". This problem is deep, he understands you will not be able to broker solutions until the "forclosure sunami" is managed. If Lenders/Investors will end up with losses through Short Sales or more costly (for the Investor and a serious credit issues for the homeowner) foreclosures, then a obvious solution would be; short pay-offs, a principle reduction that is in alignment with the current values, allowing the homeowner to stay in their home, through refinancing or restructuring. The Lender/Investor will end up in the same place, but would be doing the communities and ultimatly their own bottom line a great service. Bernanke lightly touched on this solution, and mentioned FHA ( I suspect the Agency products, Fannie Mae Freddy Mac will have their version soon)that curently has a loan program that can navigate this issue but how to get the Lenders on board? Possibly tax incentives? I do not know, but one thing is for sure, foriegn investor confidence, stocks, equity securities, and domestic confidence, will not recover until the housing market foreclosure issue is held to normal levels.

flipper-gone-wild

March 6, 2008 12:49 PM

Hey, Yall, I'm still trying to flip 6 houses and yall doing a mightly good job lowering my payments. When I'm done, I thank all yall taxpayers mightly. With the upcoming tax rebate and now a mortgage bail-out, whooweee, god bless America, cause I is styling, sliding, and making money hand-over-fist. But yall don't let the Fed mess with my gold and oil prices cause I just got a few coins in them as hedger again inflation. Thanks yall, again, for being neighborly.

Marcio - S. Florida

March 6, 2008 9:07 PM

While I support Ben's comments, I cannot overlook the fact that the president of the Fed is looking to practice closed market practices in a free market economy.

Ben,

Leave the market to correct itself. We all know foreclosures will happen and these people should have never been homeowners to begin with. They will go back to renting a home and that is also good for the economy.

Why everybody the only thing good for the economy is straight up homeownership? I would presume someone as enlightened as Mr. Bernanke would understand that homeownership level were at all time highs and that is not in line with historical data.

Bank will take a sizeable hit here, but entry-level affordability will be a great thing for people that are loking to buy and were financially responsible enough not to do so during the boom years.

Post a comment

 

About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

BW Mall - Sponsored Links

Buy a link now!