Federal Reserve Chairman Ben Bernanke today urged banks to write off part of their non-performing mortgages, a plan that analysts said underscored concern over the U.S. housing market and lending financial institutions.
(Mortgage) servicers could accept a principal write-down by an amount at least sufficient to allow the borrower to refinance into a new loan from another source, Mr. Bernanke said in prepared remarks to an Independent Community Bankers of America meeting in Orlando, Fla. A write-down that is sufficient to make borrowers eligible for a new loan would remove the downside risk to investors of additional write-downs or a redefault.
The Fed chiefs comments coincided with a Merrill Lynch analysts report saying the largest U.S. bank needs to write down more mortgage-related debt. Yes, in a way, the Fed chairman is telling the banks to take 60 cents or so on the dollar, said Robert Brusca, chief economist at consultancy FAO Economics, who added there is no good solution to the foreclosure outlook. But renegotiating a contract is a better solution for the bank than foreclosure.
Separately, Federal Reserve Vice Chairman Donald Kohn today warned of looming problems in the commercial real estate sector. Despite the generally satisfactory performance of commercial mortgages in securitized pools, spreads of yields on BBB-rated commercial mortgage-backed securities over comparable-maturity swap rates soared, and spreads on AAA-rated tranches of those securities have risen to unprecedented levels, Mr. Kohn said in prepared remarks before the U.S. Senate banking and housing committee.
Mr. Kohn added that, based on the Feds latest bank loan officer survey, the widening of spreads reflected rising concerns about lending standards for commercial mortgages and related structured finance products.
Commercial real estate borrowers that require refinancing in 2008, particularly those with short-term mezzanine loans, will face difficulty in locating new financing under tighter underwriting standards and reduced demand for commercial real estate securitizations, Mr. Kohn said.