Bernanke Recommends Buying Mortgages to Help Stave Off Foreclosures

Federal Reserve Chairman Ben Bernanke said market failure is inhibiting loan modifications and that the Fed may start buying securities to help drive down the mortgage rate.

Speaking about the housing market at a conference organized by the Federal Reserve in Washington, DC, Bernanke said mortgage foreclosures remain too high and that the U.S. government could buy mortgages in bulk. He explained that the U.S. government could share the cost of a reduced monthly payment.

"Yet another promising proposal for foreclosure prevention would have the government purchase delinquent or at-risk mortgages in bulk and then refinance them into the H4H or another FHA program," said Bernanke. "This approach could take advantage of the depressed market values of such mortgages, and buying in bulk might help avoid adverse selection problems."

Bernanke noted that mortgage rates remain high in comparison to Treasuries. He also acknowledged that 15%-20% of borrowers are "under water" on mortgages. At this current rate, lenders are on track for 2.25 million foreclosures in 2008, remarked Bernanke.

Bernanke also urged for "new steps to aid housing" by using taxpayer funds.

By Steve Stecyk and edited by Sarah Sussman
©CEP News Ltd. 2008