Fed’s Duke Urges Stronger Anti-Foreclosure Efforts (Update2)


Elizabeth Duke, governor of the U.S. Federal Reserve,

Feb. 11 (Bloomberg) -- Federal Reserve Governor Elizabeth Duke said lawmakers and regulators must step up efforts to stem foreclosures and limit damage to neighborhoods where mortgage borrowers default and lose their homes.

With housing still a “significant drag” on the economy, the government should consider the “cost of delay” in implementing changes to programs that ease loan terms, Duke said today in a speech in New York. Lenders and cities are “woefully under-resourced and unprepared” to tackle what likely will be an “extremely elevated” rate of foreclosures, she said.

Fed and government officials are targeting the housing market as part of plans to end the credit crisis and revive the economy. Yesterday, the Treasury Department said it would commit $50 billion to programs aimed at preventing foreclosures, without announcing details.

“Although it is encouraging that so many policy makers are focused on the issue of loan modifications and making thoughtful proposals, I think it is equally important that the government decide how it wishes to move forward, and then do so,” Duke said in prepared remarks to the Global Association of Risk Professionals in New York.

“The cost of delay could easily outweigh the differences in outcome between the proposals,” the former banker said.

Responding to an audience question, Duke said it’s “very, very difficult to determine when things might stabilize” in the housing market.

The Fed adopted a policy last month to ease terms on residential mortgages acquired in the rescues of Bear Stearns Cos. and American International Group Inc.

‘Long Run’

Duke, who chairs the Fed board’s consumer and community- affairs committee, said today the principle of the policy is that new terms be “sustainable in the long run,” meaning that the monthly payment is fixed, “affordable” and that the borrower’s income is verified.

The Fed is in the process of buying up to $600 billion of housing-finance debt to try to reduce mortgage rates for consumers, under a plan announced in November.

Options for changes to loan-modification programs include reducing the interest rate for borrowers in the government’s Hope for Homeowners foreclosure-prevention program or having the government buy delinquent mortgages “in bulk,” then refinance the loans, Duke said.

For properties that will enter foreclosure and consume “time and resources,” Duke urged financial companies to develop “clear policies and procedures” to release homeowners from obligations or let them stay in the house as renters.

Vacant Homes

For vacant homes, the government may need to allocate “significantly more funding” than the $3.92 billion in a law last year to aid state and local governments with home purchases and related efforts, Duke said.

Also, “wholesale dumping” of homes on the market isn’t in the interest of the public or investors, and owners may need funding to finance renovations so houses sell for higher prices, Duke said.

Duke, 56, joined the Fed’s Board of Governors in August. Before that, she was chief operating officer of TowneBank, a community bank with branches in southeastern Virginia. She was chief executive officer of another local bank for 10 years until its sale to SouthTrust Corp. in 2001.

While Duke has voted with the Fed majority on monetary- policy decisions, she dissented from the December decision to approve GMAC LLC’s conversion to a bank holding company, which let the auto lender tap U.S. financial bailout programs and help keep General Motors Corp. in business.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Molly Seltzer in New York at mseltzer4@bloomberg.net.

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net

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