Bernanke Supports Expanded FHA

Broadening the agency’s reach is the linchpin of Democrat Frank’s plan to fight foreclosures.

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Democratic efforts to enact a large-scale, taxpayer-funded rescue of struggling homeowners got a big boost Monday when Federal Reserve Chairman Ben Bernanke pledged his support for the initiative's main policy tenet.

Last week, a committee voted to move legislation designed to help borrowers avoid foreclosure to the full House for a vote. The bill, which would allow distressed homeowners to refinance into more affordable loans backed by the Federal Housing Administration, is being championed by Massachusetts Democrat Barney Frank, chairman of the House Financial Services Committee.

During a speech at Columbia Business School in New York Monday, Bernanke told the crowd that "the economic case for trying to avoid foreclosure is strong."

From the speech (emphasis is mine):

Moreover, it is important to recognize that the costs of foreclosure may extend well beyond those borne directly by the borrower and the lender. Clusters of foreclosures can destabilize communities, reduce the property values of nearby homes, and lower municipal tax revenues. At both the local and national levels, foreclosures add to the stock of homes for sale, increasing downward pressure on home prices in general. In the current environment, more-rapid declines in house prices may have an adverse impact on the broader economy and, through their effects on the valuation of mortgage-related assets, on the stability of the financial system. Thus, finding ways to avoid preventable foreclosures is a legitimate and important concern of public policy.

Bernanke even touched on a couple of specific ways to address the issue, including expanding the FHA's role in addressing the crisis (emphasis mine):

The Congress can take an important step by moving quickly to reconcile and enact legislation permitting the Federal Housing Administration (FHA) to increase its scale and improve its management of risks. Such legislation could help the FHA reach a wider range of borrowers and develop appropriate underwriting and pricing methodologies to deal with any increase in credit risk. Giving the FHA greater latitude to set underwriting standards and risk-based premiums for mortgage refinancing, as well as more flexibility in product development, would allow it to help still more troubled borrowers.

The Fed chief's words provide great cover for Republicans concerned about the political blowback of supporting a bailout. Look for Frank to use Bernanke's backing as a powerful tool in building Republican support for the effort—which will be crucial in getting the plan enacted.