Bernanke: Fed is Tackling Foreclosures

On this front, the Fed has a proposal that would restrict lenders from penalizing risky borrowers who pay loans off early, require lenders to make sure these borrowers set aside money to pay for taxes and insurance and bar lenders from making loans without proof of a borrower's income. It also would prohibit lenders from engaging in a pattern or practice of lending without considering a borrower's ability to repay a home loan from sources other than the home's value. The proposal also would curtail misleading ads for many types of mortgages and bolster financial disclosures to borrowers.

"The combination of stricter regulation and better disclosure will not solve all the problems," Bernanke said. "We do believe, however, that this proposal will give consumers much better information," he added.

In addition to this effort, Bernanke said a "strong uniform oversight of different types of mortgage lenders is critical to avoiding future problems."

The housing collapse dragged down home values, clobbering borrowers. Many were left with mortgages that exceeded the value of their homes. They were further socked by low introductory rates on their adjustable mortgages, which then reset to higher rates, making their monthly payments difficult or impossible, to afford.

"For a number of years, rapid increases in house prices effectively insulated lenders and investors from the effect of weaker underwriting, providing false comfort," Bernanke said.

In a speech earlier this month, Bernanke urged lenders to help distressed homeowners by lowering the amount of their loans. At the time, Bernanke suggested such a longer-term permanent solution may work better than shorter-term and temporary ones, where the distressed homeowner could find himself in trouble again.

To date, permanent home mortgage modifications that have occurred have typically involved a reduction in the interest rate, while reductions of the principal balance of the loan have been quite rare, he said.

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