Federal Reserve Chairman Ben Bernanke last week broke ranks with the Bush administration and strongly urged mortgage servicers to consider loan modifications that involve a write-down or permanent reduction in the amount of mortgage debt owed by borrowers.
“In this (low and declining home equity) environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means for avoiding delinquency and foreclosure,” Bernanke said in a speech at the annual convention of the Independent Community Bankers of America.
The Fed chief noted there are a number of tax-related, accounting, and legal obstacles to expanding the use of principal write-downs. But he suggested that this still may be the best approach to controlling foreclosures and mortgage losses in the current depressed housing market.
The Bush administration has not come out in favor of any specific approach for dealing with problem loans, other than urging servicers to pursue cost-effective loss mitigation strategies.
