es, Federal Reserve Chairman Ben S. Bernanke on Monday night endorsed the need for government intervention, saying that letting markets take their own course could "destabilize communities, reduce the property values of nearby homes and lower municipal tax revenues." In a speech in New York, the central bank chairman reiterated his controversial call for lenders and mortgage service companies to consider cutting the principal of some customers' loans to prevent foreclosure.
"When the source of the problem is a decline of the value of the home well below the mortgage's principal balance, the best solution may be a write-down, perhaps combined with (a government-orchestrated refinancing)," Bernanke told a Columbia Business School audience.
Bernanke stopped short of endorsing of a bill being pushed by Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, that would allow the Depression-era Federal Housing Administration to guarantee repayment of as much as US$300 billion in mortgages in return for lenders' making steep cuts in mortgage holders' loan balances.
The Fed chairman did say, though, that Congress "can take an important step by moving quickly to reconcile and enact legislation permitting the (FHA) to increase its scale...."
It wasn't the first time that Bernanke had called for lenders to accept steep cuts in loan repayment or for government to step in to slow the pace of foreclosures. He first broached both ideas in a speech in early March.
But coming just as Congress is about to take up the foreclosure issue, the central banker's remarks appeared designed to answer critics of intervention who contend that the two steps run the risk of rewarding financial bad behavior by borrowers and would involve trampling the legal sanctity of contracts.
Although the bulk of Americans continue to make their mortgage payments, according to Bernanke's reasoning late payments and foreclosures have become so widespread that they pose threats that go well beyond individual borrowers and lenders.
