Federal Reserve Chairman Ben S. Bernanke urged the government Thursday to do more to stem the rising tide of home foreclosures, the root cause of the nation’s financial crisis.
Mr. Bernanke outlined several proposals that “would require some commitment of public funds” to help struggling homeowners avoid foreclosure.
“Declining house prices, delinquencies and foreclosures and strains in mortgage markets are now symptoms as well as causes of our general financial and economic difficulties,” Mr. Bernanke said.
Consumer groups reacted with dismay to reports that the Treasury Department is considering a plan that would encourage banks to offer 4.5 percent mortgages to home buyers — but not to struggling homeowners seeking to refinance their mortgages.
The Fed chairman, in a speech at a Washington conference on housing finance, directly addressed the refinancing issue by detailing “a few promising options for reducing avoidable foreclosures.”
The Fed chairman suggested Congress could appropriate funds to subsidize interest rates for refinancing.
He effectively embraced a plan put forward by Federal Deposit Insurance Corp. Chairwoman Sheila Bair, who has proposed spending $24.4 billion to guarantee some of the losses if any modified loans go sour.
A costlier option would also require the government to share the cost of loan modifications with mortgage servicers.
A fourth “promising proposal” would have the government purchase delinquent mortgages in bulk and then refinance them.
Consumer groups, meanwhile, said the Treasury Department’s plan does not go far enough to fix the foreclosure crisis.
“What is needed is an en masse loan-modification program to avoid the 6.5 million foreclosures that Credit Suisse is projecting over the next few years,” said Kathleen Day, spokeswoman for the Center for Responsible Lending.
The program that Treasury is reportedly considering “does nothing for people in danger of losing their home,” Ms. Day said. “Home prices are in free fall, and there is a danger they will overshoot. Stopping foreclosures is the only way to prevent housing prices from overshooting.”
In an effort to halt the relentless plunge in home values, Treasury reportedly plans to exploit the federal government’s lower borrowing costs and its control of mortgage-financing giants Fannie Mae and Freddie Mac.
In recent days, interest rates for 30-year Treasury bonds have been approaching a once unthinkable 3 percent.
If banks issued mortgages at 4.5 percent, Treasury could use funds acquired at 3 percent to purchase mortgage-backed securities yielding 4.5 percent.
Banks would profit from the fees generated by issuing the mortgages. The government could profit from the 1.5 point spread.
A 4.5 percent interest rate is about one percentage point below the current 30-year fixed rate. Rates recently hovered above 6 percent.
Such a big drop in mortgage rates should shore up home prices because buyers will be able to afford bigger loans.
“By not including refinancing, the new program would not reach many people and, critically, it will not reach the people most in need of assistance, including those in default and near foreclosure,” said Jesse Van Tol, spokesman for the National Community Reinvestment Coalition.
Bob Walters, chief economist of Internet lender Quicken Loans, said that Treasury’s proposal “doesn’t do a thing for those who own homes and are struggling to meet their payments. The dark side is that it will help people who purchase the homes lost by present owners through foreclosure.”
Because the Treasury program would be temporary, it is very possible that any boost in housing prices also would be temporary, noted Nigel Gault, chief U.S. economist at IHS Global Insight. The plan also would provide a hefty subsidy to many people who would not have bought houses without it, he said.
The reported plan has not been adopted or finalized. “No decision has been made regarding this idea or any other idea under consideration,” Treasury spokeswoman Jennifer Zuccarelli said Thursday.
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