Fed's Rosengren says foreclosures to get worse

BOSTON (Reuters) - The U.S. economy will grow "well below" potential in coming quarters, and the foreclosure crisis plaguing the housing and banking sectors is likely to worsen, a top Federal Reserve official said on Monday.

Eric Rosengren, president of the Boston Fed, said lenders and borrowers should work together to modify loans to avoid even greater pain than has already been felt.

Many subprime borrowers are "experiencing a very painful human toll," Rosengren said in prepared remarks to be delivered in Boston.

"Our research suggests that the foreclosure crisis will get worse before it gets better," the official said.

He predicted economic growth would slow significantly over the next two quarters before improving gradually over the course of next year.

Rosengren called on the Federal Housing Administration to look for ways to "better meet borrowers' needs."

"Our focus on the opportunities for the FHA program to play a role in alleviating this crisis does not represent advocating a government bailout of lenders, investors, or reckless borrowers," he said.

"Rather, I am advocating using existing programs for what they were designed to do -- provide an option for low- and moderate-income borrowers to obtain financing at more affordable rates."

Rosengren said the idea that lenders should be forced to offer fixed-rate loans only, putting the onus on the borrower to actually request the option of a variable rate, was "worth exploring."

(Reporting by Scott Malone; Writing by Pedro Nicolaci da Costa, Editing by Chizu Nomiyama)