Bernake BS Home lenders told: Cut back

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    Home lenders told: Cut back

    Mortgages | Bernanke calls for reduced loan amounts, aid to borrowers

    March 5, 2008
    BY FRANCINE KNOWLES [email protected]

    Local and state officials who've called on lenders to do more to help homeowners facing foreclosure, were joined in that stance Tuesday by Federal Reserve Chairman Ben Bernanke, who urged lenders to reduce the amount of the loans to help struggling owners.

    ''This situation calls for a vigorous response,'' Bernanke said in a speech to a banking group meeting in Orlando, Fla.Even with some relief efforts under way by industry and government, foreclosures and late payments on home mortgages are likely to continue to rise, Bernanke warned. Longer-term permanent solutions may work better than shorter-term and temporary ones, where the distressed homeowner could find himself in trouble again, he said.

    Attorney General Lisa Madigan, who has blamed unscrupulous lenders for the crisis, welcomed Bernanke's recommendation.

    "That would help a lot of people," she said, adding, "We want to see solutions that are sustainable either reducing the amount of the loan or fixing a rate that's affordable."

    Bernanke acknowledged his idea might be a tough sell to lenders, whom he said, are reluctant to write down principal. ''They say 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,'' he said.

    But Mesirow Financial Chief Economist Diane Swonk says both lenders and borrowers would benefit from such action. She stressed it should be targeted at struggling home owners living in their homes, not speculators.

    "At this point in time lenders are losing on foreclosures really dramatically," she said. "It's a loss for both lenders and borrowers alike. So if they (lenders) were willing to reduce the principal . . . for legitimate homeowners, homeowners would stay in their homes. . . . That would reduce the cost and write off to lenders . . . limiting collateral damage from the subprime fallout. It would be a win win to both lenders and borrowers."

    But JP Morgan Chase, which said it has worked with customers to modify more than $675 million of subprime adjustable-rate mortgages and is in the process of modifying or refinancing an additional $3 billion of subprime ARMs, contends it doesn't have the flexibility to unilaterally reduce loan amounts.

    The bank did not originate the bulk of the mortgage loans in its portfolio, spokesman Tom Kelly said.

    "We're a large servicer of loans. We're servicing loans for investors," he said. "Reducing the loan amount, that requires investor input."

    Investors have to decide if they are financially better of owning the house or working out some modification to keep people in their homes, he said.

    Bernanke said banks were taking action, but the results are inadequate.

    "Although lenders and servicers have scaled up their efforts and adopted a wider variety of loss-mitigation techniques, more can, and should, be done,'' nationally, Bernanke said Tuesday. ''Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure."

    Chicago's Department of Housing launched a program in October targeting people at risk of losing their homes. Nearly 1,200 people have attended, said Molly Sullivan, spokeswoman for the city's Department of Housing. It appears roughly half of the people who've attended the sessions have been helped to stay in their homes, she said. But that means half are likely still at risk of losing them.

    Contributing: Associated Press

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