Bernanke Nearly Endorses 'Underwater' Bill

Federal Reserve Board Chairman Ben S. Bernanke came very close to endorsing a bill the House of Representatives is scheduled to vote on this week that would allow the Federal Housing Administration to refinance borrowers with "underwater" mortgages. The widespread decline in house prices requires lenders and servicers to develop new and flexible strategies to prevent foreclosures, the Fed chairman said in an address to the Columbia Business School. "[T]he best solution may be a writedown of principal or other permanent modification of the loan by the servicers, perhaps combined with a refinancing by the FHA or another lender," he said. The House Financial Services Committee approved an FHA refinancing bill (H.R. 5830) by a 46-21 vote May 1 that offers investors/servicers an option to refinance an underwater mortgage into an FHA-insured loan if they agree to write down the loan amount to 85% of the current appraised value. "It's in everyone's interest" to prevent avoidable foreclosures, Mr. Bernanke said, because of the "spillover effects" rising foreclosures can have on the financial markets and broader economy.