Mortgage Foreclosure & Refinance Resource

The housing collapse dragged down home values, especially clobbering subprime 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 resetting to higher rates, making their monthly payments difficult or impossible to afford. Problems in the credit markets have made refinancing a mortgage harder.

One of the suggestions Mr. Bernanke made was for mortgage and other financial companies to reduce the amount of the loan to provide relief to a struggling owner. “Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure,” Mr. Bernanke said.

With low or negative equity in their home, a stressed borrower has less ability — because there is no home equity to tap — and less financial incentive to try to remain in the home, he said.

Mr. Bernanke acknowledged this idea might be a tough sell to lenders. Lenders, he said, are reluctant to write down principal. “They said that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again,” Mr. Bernanke said.

Still, Mr. Bernanke suggested such longer-term permanent solutions may work better than shorter-term and temporary ones, where the distressed homeowner could find himself in trouble again. “When the mortgage is ‘under water’ a reduction in principal may increase the expected payoff by reducing the risk of default and foreclosure,” he said.

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.