Bernanke urges banks to adjust mortgages or face 'jingle mail'

In his strongest words to date by far on the housing and mortgage crisis, Fed Chief Bernanke gave banks two stark choices today: be willing to forgive portions of mortgage balances for borrowers underwater or face increasing "jingle mail" as homeowners walk away from properties and mail in their keys rather than continue paying mortgage payments. From the L.A. Times:

Federal Reserve Chairman Ben S. Bernanke said today that the nation's banks must be ready to go beyond stretching out interest payments or trimming rates and write down the principal of some troubled mortgages in order to avoid widespread foreclosures and break the steep dive in housing prices.

Speaking to a banking conference in Florida, where house prices have tumbled further than in almost any other state but California, Bernanke said that unless bankers act quickly, a large number of homeowners could reverse the historical pattern of people of hanging onto their homes at almost all cost and walk away from their financially troubled properties.

"In this environment," he said at another point, "principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure."

Bernanke's call for outright mortgage cuts is more sweeping than anything he has previously advocated and appears to put him at odds with the Bush administration. Although the Fed chief traced many of the housing market's -- and economy's -- problems to the fact that millions of homeowners are now "underwater" with house values that are lower than their mortgage balances, his administration counterpart, Treasury Secretary Henry M. Paulson Jr., dismissed the mismatch and said that homeowners must keep paying on their home loans.

"Being underwater does not affect your ability to pay your mortgage," Paulson said in a speech Monday. "Any homeowner who can afford his mortgage payments, but chooses to walk away from an underwater property is simply a speculator -- and one who is not honoring his obligations."

So is Paulson out of touch with reality?

The estimates by Moody's Economy.com show that by the end of this month 8.8 million homeowners -- or one in every 10 -- will either have no equity in their homes or will be in negative terrain with mortgage balances that are bigger than what their houses would fetch if sold. The West Chester, Pa. forecasting firm predicts that by the time the housing slump is over nearly 14 million homeowners, or 16%, will have zero or negative equity.