Kerri Panchuk | 05.02.08
Federal Reserve Chairman Ben Bernanke told a crowd in New York during the Columbia Business School’s 32nd Annual Dinner this week that borrowers and lenders both benefit when homes are saved from foreclosure.
He also said the foreclosure bug has strong regional ties—in other words, certain geographic areas with specific economic factors at play are faring worse when it comes to mortgage delinquencies and foreclosures.
“Many foreclosures are not preventable,” Bernanke told the crowd. “Investors, for example, are unlikely to want to hold onto a property whose value has depreciated significantly, and some borrowers
—perhaps because they were put into an inappropriate loan or because personal circumstances have changed
—cannot realistically sustain homeownership. However, if a foreclosure is preventable, and the borrower wants to stay in the home, the economic case for trying to avoid foreclosure is strong.”
Bernanke said saving homes from foreclosure is a mission that benefits the overall economy by ensuring property values on nearby homes remain stable, while also preventing downward pressures on home prices and causing subsequent declines in municipal tax revenues.
Attendees listening to Bernanke’s speech heard the Chairman elaborate on some of the regionally-driven factors that he believes spawned the recent influx of foreclosures in certain parts of the United States.
“Although many parts of the country have seen significant increases in mortgage delinquencies and foreclosures, a number of areas
—such as California, parts of Nevada, Arizona, Colorado, Florida, portions of the upper Midwest, and New England
—have been particularly hard hit,” Bernanke said.
Bernanke added that varying regional factors fueled the onslaught of foreclosures in the hardest hit regions. For instance, while parts of the Northeast and the Midwest felt the pinch of job losses, other foreclosure-riddled areas like California and Colorado experienced no dramatic shifts in unemployment over the last few years, but they did face significant declines in home values.
“Parts of New England, states in the Great Lakes region--including Minnesota, Michigan, and Wisconsin--and a number of other states, such as Nevada, show both increased mortgage delinquencies and notable increases in unemployment rates,” Bernanke asserted. “However, the behavior of unemployment does not seem sufficient to explain the increased delinquency rates in other areas, including California, Florida, and portions of Colorado, where mortgage delinquencies increased during a period in which unemployment generally decreased.”
Bernanke said California and Colorado, as well as similar regions, saw significant drops in home price values between the fourth quarter of 2006 and 2007, which paints a scenario in which loss of equity is driving the regions’ foreclosure influx.
Bernanke said this data is significant because it shows “sharp declines in house prices, and thus in homeowners' equity, reduce both the ability and incentive of homeowners, particularly those under financial stress for other reasons, to retain their homes.”
Click here to read Bernanke’s full speech.
