Bernanke says Mortgage Crisis will Continue, recommends more action (AP) (04-03-2008)

WASHINGTON (AP) -- Addressing a banking group in Florida on Tuesday, Federal Reserve Chairman Ben Bernanke said that additional action is required to prevent more distressed homeowners from falling into foreclosure.

Even with some relief efforts under way by industry and government, foreclosures and late payments on home mortgages are likely to rise "for a while longer," Bernanke warned, and suggested that mortgage and other financial companies should reduce the amount of the loan to provide relief to a struggling owner.

He did admit that this idea might be a tough sell to lenders, who would be reluctant to write down principal. "They said that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again," Bernanke said.

Still, Bernanke suggested such longer-term permanent solutions may work better than shorter-term and temporary ones, where the distressed homeowner could find himself in trouble again. "When the mortgage is ‘under water’ a reduction in principal may increase the expected payoff by reducing the risk of default and foreclosure," he said.

Source: AP