Bernanke urges banks to forgive parts of mortgages

Mar 4, 2008, 17:00 GMT

Washington - Amidst the worst housing recession and credit crisis in decades, the head of the US central bank Tuesday urged banks to forgive parts of mortgages for struggling homeowners.

The remarks by Federal Reserve Chairman Ben Bernanke before bankers in Orlando, Florida, went beyond previous Fed comments, the rescue programme passed by Congress and the policies of the Bush administration, Bloomberg financial news service reported.

'Efforts by both government and private-sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done,' Bernanke said. 'Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.'

In his report to Congress last week, Bernanke only suggested that lenders work out solutions such as offering better mortgage terms and deferred payments to the hundreds of thousands of people who have lost their homes to foreclosure.

The roiling mortgage credit crisis has undermined economic growth as consumers tighten their belts and home values fall below the inflated prices that soared after the turn of the millenium. In many cases, banks extended flexible subprime interest rates to families who were credit risks, helping to fuel housing demand and prices, but then raised mortgage rates beyond what owners could pay.

Bernanke warned that the housing crisis may deepen.

'Delinquencies and foreclosures likely will continue to rise for a while longer,' Bernanke said in the comments to the Independent Community Bankers of America. A surplus of homes for sale indicates 'further declines in house prices are likely,' he said.