Fed's Yellen warns of foreclosures' vicious cycle

LOS ANGELES (Reuters) - The intense wave of U.S. home foreclosures risks triggering a cycle of decline in some communities, and the Federal Reserve views this as an urgent problem, Janet Yellen, President of the San Francisco Federal Reserve Bank, said on Tuesday.

"The rapid rise in mortgage delinquencies has had significant negative ripple effects," Yellen said in remarks prepared for delivery at a Fed housing conference.

Yellen said that much of the recent decline in house values "reflects a realignment of prices that had risen sharply relative to fundamentals" earlier in the decade.

"The potential for further realignment and, thus, lower house prices will make it that much more difficult to limit foreclosures," she said.

Yellen largely steered clear of the broader economy and monetary policy in her remarks, a copy of which was made available in advance.

Referring to speeches last week in La Jolla, California, and Portland, Oregon, Yellen said the credit crunch, housing downturn and rise in commodity prices are "affecting the economic outlook."

"These developments pose serious challenges and will require vigilance both in monitoring events ... and in acting as needed to achieve our dual mandate of low and stable inflation and maximum sustainable employment and economic growth," she said.

Yellen is not a voting member of the policy-setting Federal Open Market Committee in 2008.

Municipal budgets are taking a hit from plummeting house prices, Yellen said, as tax revenues are lost on vacant properties and communities face rising foreclosure-related costs, such as policing abandoned properties.

"As declining property taxes and transfer fees shrink local government revenues, vital services to low- and moderate-income families may also suffer," she said, calling for "more robust and direct responses" at both the local and federal level.

(Writing by Ros Krasny; Editing by James Dalgleish)