Bernanke pushes government response to foreclosures

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 introduced 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 up to $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 Bernanke 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 March.

But coming just as Congress was about to take up the foreclosure issue, the central banker's remarks appeared designed to answer critics of intervention who argue that the two steps run the risk of rewarding financial bad behavior by borrowers and would involve trampling the legal sanctity of contracts.

Though the bulk of Americans continue to make their mortgage payments on time, Bernanke's argument goes, late payments and foreclosures have become so widespread that they pose threats that go well beyond individual borrowers and lenders.

"[H]igh rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets and the broader economy," he said. "Therefore, doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It's in everybody's interest."