Fed Chief Ben Bernanke is worried about the housing market. The number of underwater mortgages (mortgage is more than the house is worth) rose from 2.5 million in 2006 to 6 million today, and it projected to go up to 14 million by then end of the 2008. Once the mortgage goes underwater there is a lot less incentive for the borrower to keep making payments. This is a disaster for the banks, 'cause it turns a mortgage into a piece of real estate worth a lot less. Mortgage holders that cannot make the monthly payments always attempt to sell the house rather than just mailing the keys to the bank. If the owner can't sell it, the bank won't be able to sell it either. Eventually the bank will dump the house at a really low price. The bank looses a barrel of money this way. A smart bank will deal with the mortgage holder so long as the deal saves the bank money in the end.
Bernanke was urging the banks to cut deals with mortgage holders. Then he veered off into a strange place. He urged Congress to raise the size of mortgage that FHA/Fannie Mae/Freddie Mac, the quasi federal home loan business's can issue or guarantee. Congress originally felt that Federal home mortgage assistance should be limited to low and middle class home owners, buying low end to middle value houses. They put a limit of $400,000 and some change as the biggest mortgage the the feds can assist. That's a pretty healthy mortgage, in the trade they call it a jumbo mortgage. Why does Bernanke think we need bigger jumbo mortgages?
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