Activist Praises Bernanke

The Record ( — Thursday, March 6, 2008


A prominent New Jersey community activist on Wednesday cheered Federal Reserve Chairman Ben Bernanke's recent comments suggesting that bankers reduce principal amounts on problem loans to avoid foreclosures.

But she wishes he would go further.

"Its great to have a chairman of the Federal Reserve who acknowledges the problem, but what is needed is a mandate," said Phyllis Salowe-Kaye, executive director of New Jersey Citizen Action, the state's largest consumer watchdog.

"Instead of urging, he should be demanding," said Salowe-Kaye. She is backing proposed state legislation to be introduced next week that would require loan servicers to publicly disclose information on the outcomes of their loan-loss mitigation programs.

Citizen Action provides counseling to homeowners in financial distress.

Bernanke on Tuesday added his influential voice to a growing chorus of consumer advocates and lawmakers calling for the mortgage lending industry to take more drastic action to stem a rising tide of home-loan foreclosures, including cutting principal amounts of loans to reflect declines in property values and boost homeowners' equity.

Bernanke said in a speech in Orlando to members of the Independent Community Bankers that the foreclosure situation calls for "a vigorous response."

"When the mortgage is 'under water' [the amount owed exceeds the market value of the home], a reduction in principal may increase the expected payoff by reducing the risk of default and foreclosure," he said.

Bernanke acknowledged that lenders are resistant to the notion of reducing principal amounts because it would put the value of their loan portfolios more at the mercy of real estate price fluctuations.

In 2007, the financial services industry wrote down more than $159 billion related to losses in credit and lending portfolios.

"We think it makes sense to look at anything that will help keep people in their homes," said Tom Kelly, spokesman for JPMorgan Chase & Co.

He added that the New York-based bank already practices principal reductions on a "very limited basis."

James Silkensen, president of the 71-member New Jersey League of Community Bankers, said Wednesday that the group has not yet taken a position on the issue.

"It could possibly come up at the next board meeting at the end of March," he said. "I don't see much impact on community banks who wrote their loans soundly."

Loan servicers and others have been reaching out to borrowers in financial distress to try to keep them in their homes by negotiating payment catch-up plans, modifying the interest rate, or refinancing into more affordable loans.

If they lack sufficient equity in the home, they cannot qualify for refinancing.

So refinancing and loan modifications "are not happening at a huge pace," said Salowe-Kaye.

This article contains material from The Associated Press.

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