Bernanke discusses pros and cons of principal reductions
Principal reductions on mortgages could prove helpful in reducing home loan delinquencies if they are structured correctly, Federal Reserve Chairman Ben Bernanke said Wednesday. While Bernanke did not take a definite position on principal reductions and loan modifications, he told journalists at a press conference following the two-day meeting of the Federal Open Markets Committee that the central bank has a strong interest in the housing sector and mortgage finance. "We did a white paper that looked at refinancing, principal reductions and mortgage finance," Bernanke said. "Our intent in that white paper was to provide the benefit of our analysis to the public and to those who intend to make policy." He said Fed economists have varying views on whether principal reductions could actually help borrowers while stimulating the broader economy. Still, there's a downside to principal writedowns with so many homeowners already in negative equity positions, Bernanke asserted. "There is not one single program that is going to get everyone out of negative equity," he said. With that in mind, he said the ultimate policy question is "what will be the most cost-effective way to help the most people as possible." Bernanke elaborated on the Fed's recent white paper on how to stimulate the housing market, saying the report was a Fed attempt to foster legislative policy. "The Federal Reserve has a strong interest in the housing sector," Bernanke said. "The weakness of the housing sector is an important reason why the recovery today is not more robust." Bernanke made those statements after the Fed announced plans to keep the federal funds rate low through 2014. The chairman also said the central bank has not ruled out additional accommodative policies, including an expansion of the its balance sheet if economic conditions warrant involvement in the future. Write to Kerri Panchuk.