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Federal Reserve Governor Elizabeth Duke says that the housing crisis shows why banks need to be supervised.

PHOENIX - Federal Reserve Governor Elizabeth Duke said Monday the crisis in housing highlights the need for vigorous enforcement of bank rules and questioned the wisdom of letting banks affiliate with commercial firms.

In prepared remarks for delivery to the American Bankers Association (ABA), Duke said bankers "have a responsibility to act in a safe and sound manner" and urged them to do more to help slow the pace of home foreclosures.

She said that letting banks and commercial firms affiliate "threatens the ability of banks to continue to serve as effective and objective intermediaries of credit" by exposing them to risks that commercial affiliates take.

Duke, who became a Fed governor last August, is a former chairwoman of the ABA and was a senior executive at a Virginia-based community bank before taking her current U.S. central bank position.

Duke repeated a call she made in a New York speech last Tuesday for more policy action to cope with the housing sector's weakness, warning that it is damaging the whole economy and reinforcing strains in the U.S. financial system.

She said the crisis arose partly from borrowers who did not understand the risks they were taking in some mortgages but also from lenders being so eager to make loans that they failed to pay attention to consumers' ability to keep up payments.

Supervision and enforcement need to be stepped up to make sure banks and other entities offering mortgages comply with regulations, Duke said.

"One of the lessons we have learned in the current crisis is that different levels of supervision and enforcement can cause problems, even when institutions are ostensibly following the same regulation," she said.

Duke repeated that housing activity was "extraordinarily weak" and called on policymakers to step up actions to counter it. "Weakness in the housing sector remains a significant drag on the macroeconomy and is reinforcing the strains in the financial system," she warned.

She said measures were needed to slow the pace of home foreclosures which topped 2 million last year. But she cautioned that no matter what is done, more pain lies ahead.

"Even under optimistic assumptions for the number of loan modifications and other forms of private and public assistance that may be realized, the pace at which foreclosures are likely to be initiated is likely to remain extremely elevated," Duke said.

She urged banks to develop clear policies for speeding up so-called short sales and to consider options like allowing borrowers the chance to remain in their homes as renters rather than owners. That would benefit banks and borrowers because it would act as an inducement to modify payment terms so they could be sustained, Duke said. To top of page

SOURCE: http://money.cnn.com/2009/02/16/news/economy/fed_duke.reut/index.htm


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