Wednesday, May 7, 2008

Bernanke speech on foreclosures - May 5th

Fed chair Bernanke addresses the Columbia Business School in New York on the problem of mortgage delinquencies and foreclosures. The stress in the U.S. housing market is not abating, foreclosures are rising an home prices are falling. He calls on Congress to allow for a larger participation of the Federal Housing Administration and the GSEs in the rescue efforts. He seems to be at odds with the administration and suggest a "write-down of principal or other permanent modification of the loan by the servicer" when the value of the home has fallen well below the value of the mortgage loan. Bill Gross and others are suggesting a similar approach, which seems increasingly likely given the current situation.

About one quarter of subprime adjustable-rate mortgages are currently 90 days or more delinquent or in foreclosure. Delinquency rates also have increased in the prime and near-prime segments of the mortgage market, although not nearly so much as in the subprime sector. As a consequence of rising delinquencies, foreclosure proceedings were initiated on some 1.5 million U.S. homes during 2007, up 53 percent from 2006, and the rate of foreclosure starts looks likely to be yet higher in 2008. Nationally, as of the fourth quarter of 2007, the rate of serious delinquency, as measured by credit records, stood at 2 percent of all mortgage borrowers, up nearly 50 percent from the end of 2004.

On the subject of additional mortgage initiatives:
The Congress can take an important step by moving quickly to reconcile and enact legislation permitting the Federal Housing Administration (FHA) to increase its scale and improve its management of risks. ...Giving the FHA greater latitude to set underwriting standards and risk-based premiums for mortgage refinancing, as well as more flexibility in product development, would allow it to help still more troubled borrowers.

In addition, because the GSEs have resolved some of their accounting and operational problems, their federal regulator, the Office of Federal Housing Enterprise Oversight, has lifted some of the constraints that it had imposed on them. Thus, now is an especially appropriate time for the GSEs to move quickly to raise significant new capital, which they will need to take advantage of these new securitization and investment opportunities, to provide assistance to the housing markets in times of stress,
and to do so in a safe and sound manner.

Bernake's "heat maps", showing data for the fourth quarter of 2007, are somewhat outdated. The situation has deteriorated significantly. It is noted that the home price chart uses the OFHEO numbers which are significantly less severe than the Case-Shiller home price index.

click to enlarge

source: Mortgage Delinquencies and Foreclosures
Chairman Ben S. Bernanke
At the Columbia Business School's 32nd Annual Dinner, New York, New York, May 5, 2008

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