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Bernanke calls for mortgage reductions

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Tess Vigeland: Federal Reserve chairman Ben Bernanke was back talking about the mortgage mess today. He told bankers in Florida that it’s in their own interest to do more to help homeowners avoid foreclosure.

His suggestion? Lop off some of the principle they owe on their mortgages and hopefully keep them from going, in Bernanke’s words, “underwater.”

From Washington, Marketplace’s John Dimsdale reports the whole idea has banks more than a little squeamish.

John Dimsdale: Bernanke acknowledged lenders will be reluctant to trim the size of their loans, especially since they’d come under pressure to write down the principal again if home prices continue to fall.

But Congressman Barney Frank, the chairman of the House Financial Services Committee, welcomed Bernanke’s call for more responsibility from lenders:

Barney Frank: What we are saying to the lenders is “guys, you made mistakes and that isn’t worth what you thought it was going to be worth — it’s not worth literally that paper that it’s written on — and you have two choices: you can try to collect legally what you’re entitled to and wind up with nothing, with foreclosure, with a lot of grief, or you can write this down to a reasonable level, accept the fact that you over-lent, take some losses, but not lose everything.”

Once the loan more accurately reflects the value of the home, Frank says the Federal Housing Authority could step in to insure the refinanced loan.

But Peter Wallison at the American Enterprise Institute says the plan only works if the borrower has made at least a 10 percent down payment on the house.

Peter Wallison: If the writedown idea results in the homeowner getting a loan from the government which is 97, 98 or even a hundred percent of the value of the written-down property, the homeowner is likely to default in the future. As a result, we will have the government bearing many of the losses that lenders are now bearing.

Some bank managers predict there’ll be a lot of industry opposition to Bernanke’s idea, especially from bankers who feel they’ve been responsible in their mortgage lending.

In Washington, I’m John Dimsdale for Marketplace.

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