Bernanke Addresses the Issue of Irregularities in Foreclosure Practices

The following remarks on mortgage foreclosures were delivered by Chairman Ben Bernanke at the Federal Reserve System and Federal Deposit Insurance Corporation Conference on Mortgage Foreclosures and the Future of Housing, Arlington, Virginia October 25, 2010:

Before I address the specific topics of this conference, I would like to note that we have been concerned about reported irregularities in foreclosure practices at a number of large financial institutions. The federal banking agencies are working together to complete an in-depth review of practices at the largest mortgage servicing operations. We are looking intensively at the firms' policies, procedures, and internal controls related to foreclosures and seeking to determine whether systematic weaknesses are leading to improper foreclosures. We take violations of proper procedures seriously. We anticipate preliminary results of the review next month. In addition, Federal Reserve staff members and their counterparts at other federal agencies are evaluating the potential effects of these problems on the real estate market and financial institutions.

Any discussion of housing policy in this country must begin with some recognition of the importance Americans attach to homeownership. For many of us, owning a home signaled a passage into adulthood that coincided with the start of a career and family. High levels of homeownership have been shown to foster greater involvement in school and civic organizations, higher graduation rates, and greater neighborhood stability.

Recognizing these benefits, our society has taken steps to encourage homeownership. Tax incentives, mortgage insurance from the Federal Housing Administration, and other government policies all contributed to a long rise in the US homeownership rate — from 45 percent in 1940 to a peak of 69 percent in 2004. But, as recent events have demonstrated, homeownership is only good for families and communities if it can be sustained. Home purchases that are very highly leveraged or unaffordable subject the borrower and lender to a great deal of risk. Moreover, even in a strong economy, unforeseen life events and risks in local real estate markets make highly leveraged borrowers vulnerable.

It was ultimately very destructive when, in the early part of this decade, dubious underwriting practices and mortgage products inappropriate for many borrowers became more common. In time, these practices and products contributed to problems in the broader financial services industry and helped spark a foreclosure crisis marked by a tremendous upheaval in housing markets. Now, more than 20 percent of borrowers owe more than their home is worth and an additional 33 percent have equity cushions of 10 percent or less, putting them at risk should house prices decline much further. With housing markets still weak, high levels of mortgage distress may well persist for some time to come.

In response to the fallout from the financial crisis, the Fed has helped stabilize the mortgage market and improve financial conditions more broadly, thus promoting economic recovery. What may be less well known, however, is what the Fed has been doing at the local level. As the foreclosure crisis has intensified, Federal Reserve staff in our research, community development, and supervision and regulation divisions have actively collaborated to support foreclosure prevention at the local level and promote neighborhood stabilization initiatives.

A key initiative developed under the leadership of Federal Reserve Bank of Chicago President Charles Evans has been the Mortgage Outreach and Research Effort, known as MORE. MORE involves all 12 Federal Reserve Banks and the Board of Governors in a collaboration that pools resources and combines expertise to inform and engage policymakers, community organizations, financial institutions, and the public at large.

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Bernanke Addresses the Issue of Irregularities in Foreclosure Practices

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