Will Mortgage Refinancing be affordable?

Exotic new asset-backed securities were so obtuse and opaque that investors couldn’t accurately gauge their risks, Federal Reserve chairman Ben Bernanke told Congress. As a result, global financial losses have far exceeded even the most pessimistic estimates of the credit losses on these loans.

To that end, he cautioned Congress not to overreact in efforts to help homeowners. The risk of moral hazard must be considered in designing government-backed programs, he said. Such programs should not bail out failed investors, as doing so would only encourage excessive risk-taking. Bernanke added that he was aware of the potential effect the mortgage market can have on the broader economy, and will act accordingly.

At the same time, the Fed also cut its discount rate by a half percentage point. Still, Bernanke warned that the danger has not passed. He noted that dodgy adjustable-rate subprime mortgages written in 2005 and 2006 are particularly problematic, with some of them defaulting after only one or two payments (or even no payment at all).

At the same time, he said, a recent sharp deceleration in home-price increases and even outright declines in some markets has left many recent borrowers with little or no home equity. Under these circumstances, he said, some borrowers particularly speculators have concluded that their best option was to simply walk away from their properties. The lack of home equity has made refinancing difficult for many, especially those with adjustable rate mortgages.

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