Nine days after the Federal Reserve announced its plan to buy up to $500 billion in mortgage-backed securities from government-sponsored entities, Fed chairman Ben Bernanke said in a speech Thursday that the key to the troubled housing market’s recovery will be even more government intervention with more taxpayer dollars. Although he acknowledged the Fed’s actions recently in concert with the Treasury Department and Federal Deposit Insurance Corp. to help stabilize the system and increase capital liquidity to the commercial paper market, he said there is more to be done before the system will recover. “Because housing and mortgage markets are tightly interlinked with the rest of the economy, actions to strengthen financial markets and the broader economy are important ways to address housing issues,” he said. “By the same token, steps that stabilize the housing market will help stabilize the economy as well.” Steps have been taken by financial institutions to implement mass modification programs, but foreclosure rates remain “too high,” according to Bernanke. “To be effective, loan modifications should aim to put borrowers into mortgages that they can afford over the longer term.” To achieve this affordability, Bernanke suggested a number of initiatives that can be taken, all involving government expense. One of the first strategies Bernanke suggested was strengthening the Hope for Homeowners (H4H) program and particularly reducing the interest rate that, which holds at roughly 8 percent “because it is tied to the demand for the relatively illiquid securities issued by Ginnie Mae to fund the program.” He suggested either the Treasury could purchase these illiquid securities to bring down the rate, or Congress could subsidize the rate so that more homeowners could participate. Bernanke also proposed the implementation of a plan put forward by the FDIC, which strives to improve the affordability of monthly payments by encouraging servicers to restructure delinquent mortgages using a streamlined process. The plan, Bernanke said, would be modeled on the IndyMac Federal Bank protocol, aim to reduce monthly payments to 31 percent of the borrower’s income and offer $1,000 and a redefault loss sharing program to the servicer for each completed modification. Of the other initiatives proposed were a government purchase of delinquent or at-risk mortgages in bulk and subsequently refinancing them into H4H or Federal Housing Administration programs, and a government cost-sharing of loses sustained when the servicer reduces the borrower’s monthly payment. “For example, a servicer could initiate a modification and bear the costs of reducing the mortgage payment to 38 percent of income, after which the government could bear a portion of the incremental cost of reducing the mortgage payments beyond 38 percent, say to 31 percent, of income,” he said. “This approach would increase the incentive of servicers to be aggressive in reducing monthly payments, which would improve the prospects for sustainability.” Read Bernanke’s speech. Write to Diana Golobay at [email protected].

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