Foreclosure crisis needs Congress' help

May 6, 2008 12:22:53 AM PDT
A dire warning came Monday night from the Chair of the Federal Reserve. The foreclosure crisis threatens to further derail the economy unless Congress steps in. ABC7 takes a closer look at Ben Bernanke's proposals.

The mortgage meltdown has caused banks to tighten their lending standards. So much so, that it's affecting everything, from credit cards to student loans.

"Education is pretty expensive as it is, and if you know, if no one is there to give you a loan, what do you do? You're kind of stuck," says Rahul Raghu, a U.C. Berkeley student.

According to the Federal Reserve, some 1.5 million U.S. homes entered into the foreclosure process last year, up 53 percent from 2006. Monday night, Federal Reserve Chairman Ben Bernanke says the foreclosure rate is expected to be even higher this year, which is why he is calling on Congress to take action.

"High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets and the broader economy. Therefore, doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers, it's in everybody's interest," says Bernanke.

Bernanke wants Congress to give the Federal Housing Administration, which insures mortgages, more flexibility to help borrowers at risk of losing their homes. He also wants banks to reduce loan amounts if the loan is bigger than the home value. But U.C. Berkeley professor Tom Davidoff Ph.D., of the Haas Real Estate Group says that proposal could backfire, as it may discourage banks from lending to future homebuyers.

"If the government today says, 'You know what, you banks have to give away money to your borrowers,' then banks may say, 'Geez if I issue more mortgages today, down the road the government might force losses on me,'" says Davidoff. "If the borrowers don't do lending and people can't buy homes and that's worse, not better for the housing situation."

Bernanke also urged lawmakers to revamp Fannie Mae and Freddie Mac, which finance mortgages. He also called on the two mortgage giants to quickly raise new capital. House leaders plan to discuss that and other housing measures later this week.


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