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Ben Says It Like It Is

Fed Chief Ben Bernanke has been criticized for shifting course a bit too much, raising interest rates, then lowering them, and not moving swiftly to address the housing crisis. But his speech today before community bankers in Orlando shows he’s really a breath of fresh air compared to his predecessor Alan Greenspan.

Bernanke lays out the problem very succinctly.

“The recent surge in delinquencies in subprime ARMs is closely linked to the fact that many of these borrowers have little or no equity in their homes,” he said. “Small down payments were combined with other risk factors, such as a lack of documentation of sufficient income to make the required loan payments.”

As Bernanke sees it “delinquencies and foreclosures likely will continue to rise for a while longer.” He’s forecasting further declines in home prices. In 2008, he said, about 1.5 million loans—representing more than 40% of the outstanding subprime ARMs—are scheduled to reset at rates around 9.25%.

Bernanke is looking for free market solutions to the problem, while still plunging in to help. He says the Fed has been sharing its data with consumer groups who then host information workshops and distribute available funds to help homeowners in trouble. New FHA loan programs will allow some borrowers to refinance. Bernanke is calling on lenders and mortgage securities investors to renegotiate problem loans or to let borrowers out from under them.

Bernanke said the number of such subprime mortgage workouts rose from around 250,000 in the third quarter of 2007 to 300,000 in the fourth quarter, while workouts of prime mortgages rose from 150,000 to 175,000 over the same period. The pace picked up more in January.

“Reducing the rate of preventable foreclosures would promote economic stability for households, neighborhoods, and the nation as a whole,” he said. “Although lenders have scaled up their efforts, more can, and should, be done.”

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