From Homescape

In a speech to a banking group meeting in Orlando, Fla., on Tuesday, Federal Reserve Chairman Ben Bernanke voiced his concern over the housing market’s impact on the country’s economy, and advised that “reducing the rate of preventable foreclosures would promote economic stability for households, neighborhoods and the nation as a whole,” the New York Times reported.

Bernanke’s solution                                                                                                           

Federal Reserve Chairman Ben Bernanke

Despite lenders and servicers attempts to scale up their efforts and adopt a wider variety of loss-mitigation techniques, “more can, and should be done,” Bernanke said. One of his suggestions was for mortgage and other financial companies to reduce the principal amount of a home loan in order to provide relief to a struggling owner. Bernanke believes that reductions in interest rates have not done enough to fend off possible foreclosures and massive delinquencies, and that principal reductions will restore some equity back in sinking home values. Owners are more likely to walk away from their homes if their monthly payments exceed the value of the property, he argued.

This is going to be a tough sell to lenders. If home values continue falling, lenders may have to write down the principal even further, forcing them to loose even more money. This isn’t the kind of plan lending giants such as Fannie Mae — who just last week reported a fourth quarter net loss of $3.56 billion — will take warmly towards. While acknowledging this problem, Bernanke suggested that such longer-term permanent solutions may work better than shorter-term and temporary ones, where the distressed homeowner could find himself in trouble again.

HOPE NOW                                                                                                                        

U.S. Treasury Secretary Henry Paulson

Treasury Secretary Henry Paulson has voiced strong opposition to using government funds to “bailout” homeowners and has focused his attention on a private solution from the financial companies. But he has publicly acknowledged that the current HOPE NOW initiative has bared little fruit. 

In a speech to the National Association for Business Economics (NABE) earlier this week, Paulson said more than 80 percent of “at-risk homeowners aren’t responding to letters sent by the HOPE NOW Alliance of mortgage lenders.” While the lenders have restructured more than 45,000 subprime loans in January, up 16 percent from December, only about 200,000 distressed homeowners have responded to the more than 1 million letters sent out by the alliance, he said.

Public Enemy No. 1
In a survey released by the NABE on Monday, 34 percent out of the 259 economists who participated ranked the subprime loan crisis as the No. 1 threat to the economy over the next two years. That compares with 18 percent from the same survey taken in August.

Paulson believes the Fed’s recent interest-rate cuts are having a big impact on stemming foreclosures. But if inflation continues to climb as it has, the Feds will have to raise rates, and realistically, it will have to choose which two-headed monster to battle. Some economists believe if the Fed continues to trim rates, the economy in the long haul will head into a steeper recession that will be more relentless than the one in 2001.

The combination of weak growth and rising inflation raises the threat of a return of “stagflation,” the economic curse of the 1970s in which economic growth stagnates at the same time that inflation races ahead. I don’t know about you, but I’ve never been a fan of disco music and bell-bottom pants. I’m hoping history doesn’t repeat itself again.

Got hot local housing tips or a story you want to share? Contact Amy Le at openingdoorsblog@homescape.com