Bernanke says lenders need more options

updated 4:45 p.m. ET Aug. 29, 2007

WASHINGTON - Federal Reserve Chairman Ben Bernanke suggested that policymakers look for ways to encourage a wider range of mortgages geared for low income and other borrowers who have been hard hit by the housing slump and credit crunch.

Bernanke, in a letter to Sen. Charles Schumer, D-N.Y., released Wednesday, said the Fed is keeping close tabs on financial markets and is "prepared to act as needed" to make sure spreading credit problems that have rocked Wall Street in recent weeks don't hurt the economy. It's a message the central bank has been sending in recent weeks as the markets have grown more turbulent.

Foreclosure and late payments have spiked especially for "subprime" borrowers with blemished credit histories or low incomes. Higher interest rates and weak home values have made it impossible for some to pay or keep up with their monthly mortgage payments. Some overstretched homeowners can't afford to refinance or even sell their home.

Bernanke said the development of "a broader range of mortgage products which are appropriate for low- and moderate-income borrowers, including those seeking to refinance" might help the situation. "Such products could be designed to avoid or mitigate the risk of prepayment shock and to be more transparent with respect to their terms," Bernanke wrote in the letter, which was dated Monday.

Mortgage foreclosures and late payments are expected to get even worse in the next year and half as low "teaser" rates that lured in borrowers reset to higher rates, socking some homeowners. Some 2 million adjustable rate mortgages are expected to reset to higher rates this year and next.

Bernanke said the Federal Housing Administration, a government agency that insures home loans, might be able to help.

"The Congress might wish to consider FHA reforms that allow the agency more flexibility to design new products and to collaborate with the private sector in facilitating the refinancing of creditworthy subprime borrowers facing large resets," Bernanke said.

The Bush administration is looking into ways that the Federal Housing Administration, part of the U.S. Department of Housing and Urban Development, may be able to help troubled homeowners with low incomes or tarnished credit histories.

Mortgage giants Fannie Mae and Freddie Mac, meanwhile, "should be encouraged to provide products for subprime borrowers to the extent permitted by their charters," Bernanke said. He didn't provide specifics and believed that caps on the two mortgage companies' portfolios need not be raised to accommodate new borrowers.

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