WASHINGTON (MarketWatch) -- The private sector and Congress should create new, affordable mortgage products that would help some homeowners refinance their mortgages and keep their homes, Federal Reserve Chairman Ben Bernanke suggested in a letter released Wednesday.
In the letter to Sen. Charles Schumer, D-N.Y., Bernanke repeated that the Fed is closely monitoring markets and stands ready to act if needed. The Fed issued a statement with almost identical wording on Aug. 17 after it cut the discount lending rate to 5.75%. The letter from Bernanke was dated Aug. 27 and released by Schumer's office on Wednesday.
Calling it a "bullish" letter, bond market strategist Tony Crescenzi of Miller Tabak said Bernanke was "very sympathetic to concerns expressed quite strongly in the financial markets of late."
"If this tone is repeated on Friday, the conclusion will be that the Fed will lower the fed funds rate" by the Sept. 18 meeting of the Federal Open Market Committee, Crescenzi said. Bernanke is scheduled to give a speech on housing and housing finance on Friday.
Most economists and market participants expect a rate cut by the FOMC.
In his letter, Bernanke called for creative thinking to get the nation out of its subprime mess.
"It might be worth considering at this juncture whether the private and public sectors, separately or in collaboration, could help the situation by developing a broader range of mortgage products which are appropriate for low-and moderate-income borrowers, including those seeking to refinance," Bernanke wrote.
"Such products could be designed to avoid or mitigate the risk of payment shock and to be more transparent with respect to their terms," Bernanke wrote. "They might also contain features to improve affordability, such as variable maturities or shared-appreciation provisions for example."
Congress is considering legislation that would reform the Federal Housing Administration, which is a federal agency that provides mortgages to low-income buyers. FHA loans have been largely supplanted by subprime lending from the private-sector. But FHA loans, with tighter lending standards and less onerous terms, have not defaulted at the rates recently seen in subprime loans.
Under current law, the FHA cannot lend to those who are behind on their mortgage payments.
Congress is also considering legislation that would reform oversight of the so-called government-sponsored entities Fannie Mae (FNM:Fannie Mae
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Some have suggested that Fannie and Freddie be allowed to buy more mortgages beyond their current maximum as a way of injecting more liquidity into very tight money markets. It has also been suggested that Fannie and Freddie be allowed to buy mortgages larger than the $417,000 conforming loan limit. The White House has opposed any loosening of Fannie and Freddie's buying.
Bernanke said Fannie and Freddie could expand their lending without changing their portfolio caps by selling some of their current holdings in the market.
Rex Nutting is Washington bureau chief of MarketWatch.