Fed's Kroszner says home loan writedowns needed

New home construction continues at a new housing subdivision in San Marcos California August 20, 2007.

WASHINGTON (Reuters) - The soaring volume of homes worth less than the mortgages on them means that banks need to consider writing down the value of the loans, Federal Reserve Governor Randall Kroszner said on Wednesday.

"The fact that many troubled borrowers have properties that are now worth less than the principal amounts ... suggests that lenders and servicers should give greater consideration to the use of principal reduction as one of the loan modification options in their tool kit," Kroszner told the U.S. House of Representatives Financial Services Committee.

He said home foreclosures in 2008 will top the 1.5 million of 2007 and noted that in January some 24 percent of subprime adjustable rate mortgages were behind on payments, double the fraction that were delinquent a year earlier.

Kroszner said that given the scale of the nation's housing woes, "it is in everyone's interest to develop prudent loan modification programs."

He said a U.S. Treasury-brokered plan for temporary freezes on adjustable-rate mortgages for some borrowers was one example but strongly suggested more aggressive measures were needed.

"In this environment, servicers and investors may well find principal reductions that restore some equity for at-risk homeowners to be an effective means of avoiding delinquency and foreclosure," Kroszner said.

He suggested that writedowns of loans could be "targeted" through means such as limiting them to people who had high debt payment-to-income levels so that they would be available only to those who genuinely needed them.

Kroszner urged Congress to speed up action on proposals to modernize the Federal Housing Administration, the Depression-era agency that insures mortgages issued by FHA-approved lenders. That would "increase its scale and improve the management of potential risks borne by the government" as it copes with the housing market's distress.

"Separately, the GSEs -- Fannie Mae FNM.N and Freddie Mac FRE.N -- could be asked to do more," Kroszner said.

He said it would be "an especially appropriate time" for those government-sponsored enterprises to quickly raise capital so that they can take advantage of recent moves to let them buy bigger loans and play a larger role in mortgage markets.

(Reporting by Glenn Somerville; Editing by James Dalgleish)