March 5 (Bloomberg) -- Treasury Secretary Henry Paulson may need to revise his strategy for stemming record U.S. home foreclosures after Federal Reserve Chairman Ben S. Bernanke urged lenders to forgive portions of some loans.

Bernanke's call, in a speech yesterday to bankers in Orlando, Florida, went beyond a Paulson-backed plan that focuses on renegotiating interest rates. With his remarks, the Fed chief joined the heads of the Office of Thrift Supervision and Federal Deposit Insurance Corp. and congressional Democrats in proposing stronger actions than Paulson to alleviate the worst housing recession in a quarter century.

``This puts enormous pressure on Paulson,'' said Michael Barr, a former Clinton administration Treasury official who is now professor at the University of Michigan Law School in Ann Arbor. ``Treasury's response so far has been insufficient.''

Paulson's increasing isolation may spur him to demand faster results from the Hope Now alliance of mortgage lenders he helped set up last year, or to consider new measures. Bernanke's speech highlighted a deepening threat from house prices dropping below mortgages, something Paulson played down the day before.

The positions of Bernanke and Paulson have evolved since both at the start of last year claimed that the jump in subprime mortgage delinquencies was ``contained.'' Bernanke has since proposed tighter regulations to stop abusive lending practices and sent notices to banks urging loan modifications. Paulson's focus has centered on private initiatives.

`Too Slowly'

``Bernanke has been pretty good on this; generally, he's done the right thing,'' said Democratic Senator Sherrod Brown of Ohio, a member of the Senate Banking Committee. Paulson ``has moved too slowly'' and ``we need to do way better than we've done as a government,'' he said in a Bloomberg Television interview. Ohio has the sixth-highest foreclosure rate.

Policy makers and legislators are trying to grapple with a surge in foreclosures that may reach 2 million this year. Prices for existing homes fell in 2007 for the first time since the Great Depression, the National Association of Realtors said in January.

Paulson, asked about Bernanke's remarks in an interview yesterday with American Public Radio's Marketplace program, said ``there will be instances where lenders are going to clearly see that the best solution for them which is less costly than a foreclosure is going to be a writedown of principal on a mortgage.''

`More Effective'

That stopped short of Bernanke, who said at a conference of the Independent Community Bankers of America that ``more can, and should, be done'' to limit foreclosures. He added that principal reductions ``may be a relatively more effective means of avoiding delinquency and foreclosure'' than renegotiating interest rates.

Bernanke also said ``the current housing difficulties differ from those in the past, largely because of the pervasiveness of negative equity positions.'' By contrast, Paulson said in an interview with Bloomberg Television on March 3 that ``almost too much'' has been made out of negative equity.

``What Hank seems to be saying is, `let's not even look at these recent proposals,''' said Democratic Representative Barney Frank of Massachusetts, who heads the House Financial Services Committee. ``There's a consensus building between us and some of the regulators that more is needed.''

Frank warned last week that the ``cascade of foreclosures will continue'' without government action.

Other Regulators

FDIC Chairman Sheila Bair said last month that lenders ``should be more aggressive about writing down principal.'' OTS Director John Reich proposed a plan for refinancing mortgages at current home prices, with loan servicers getting certificates that can be redeemed if values rise by the time the property is sold.

The call for forgiving portions of home loans may spur opposition from bond investors concerned it will reduce the value of mortgage-backed securities, which have already slid and caused banks to post billions of dollars of credit losses.

``We could not imagine that the policy response would be to pour napalm on the fire,'' said Julian Mann, who helps manage $3.4 billion of bonds at First Pacific Advisors LLC. ``I'm going to demand higher and higher rates'' to buy mortgage debt if the collateral is altered, he said.

Mortgage servicers ``should have a clear basis for concluding'' that borrowers are unable to make their payments before reducing loan principal, the American Securitization Forum, a New York-based lobbying group, said in a statement.

Government Funds

Bernanke has also indicated a greater willingness to consider using government funds. He told lawmakers last week that it was ``worthwhile'' to consider using public money if the housing contraction worsens. Paulson said the use of taxpayer money was a ``non-starter.''

Paulson has reversed course in the past. Last year, he opposed raising the $417,000 limit on mortgages that Fannie Mae and Freddie Mac are allowed to buy and package into bonds. He agreed to a temporary increase in January, saying he ``got run down by a bipartisan steamroller'' in negotiating with Congress.

``The risks are very high that the steamroller is not going to be stopped,'' said Mark Zandi, chief economist of Moody's Economy.com in West Chester, Pennsylvania. ``The window's going to close very quickly, and they have about six to 12 weeks to figure out what's next.''

To contact the reporter on this story: John Brinsley in Washington at jbrinsley@bloomberg.net

Last Updated: March 5, 2008 00:03 EST