Referring to the high standards of lenders following the housing bust, Bernanke said that “some tightening was no doubt necessary.”

“That being said, the pendulum has probably swung too far in the other direction by this time,” he said. “Conditions are still too tight for the health of both the financial system, for the construction industry and for our economy. ”

It is imperative to reconsider the compensation structure so that servicers have adequate incentives to perform payment processing efficiently on performing mortgages, and to perform effective loss mitigation on delinquent loans.

I believe that as a country, we need to take this opportunity to rethink many aspects of our public policy programs in the context of housing finance. Home ownership has long been part of the American dream, in no little part because home owners have invested not just in their houses but in their communities. But, through the mortgage interest tax deduction and other programs, we are encouraging people to buy homes by taking on debt—and sometimes large amounts of debt. If we truly want to encourage home ownership, we should contemplate programs that provide incentives for individuals to save and become equity holders in their homes—and, by extension, in their communities.

Even in the case of a servicer who has every best intention of doing "the right thing," the bottom-line incentives are largely misaligned with everyone else involved in the transaction, and most certainly the homeowners themselves.

The public policy response to the housing market collapse has become increasingly aggressive as the severity and extent of the collapse have become clearer. One might expect lenders to modify mortgages, making them more affordable for borrowers, rather than accepting large losses on foreclosed properties. However, for various reasons, the number of modifications has been lower than we might have hoped.

[W]ith the exception of housing, lending over the current downturn does not appear particularly weak or subdued relative to other downturns. Indeed, for all categories of lending other than home mortgage lending...there are at least two other downturns for which the paths of lending after the business cycle peak lie below that following 2007:Q4

One widely held misperception is that CRA is only about mortgage lending to low- and moderate-income borrowers in lower-income neighborhoods.  As a former community banker, I know that CRA's impact is just as important in meeting the needs of small farms and businesses and, as such, it serves as a valuable catalyst for job creation in both urban and rural areas across the country.  This point is particularly noteworthy at a time when mounting job losses are adding to the woes of consumers and exacerbating the problems in housing and mortgage lending.

Some critics of the CRA contend that by encouraging banking institutions to help meet the credit needs of lower-income borrowers and areas, the law pushed banking institutions to undertake high-risk mortgage lending. We have not yet seen empirical evidence to support these claims, nor has it been our experience in implementing the law over the past 30 years that the CRA has contributed to the erosion of safe and sound lending practices.

...

Two key points emerge from all of our analysis of the available data. First, only a small portion of subprime mortgage originations are related to the CRA. Second, CRA- related loans appear to perform comparably to other types of subprime loans. Taken together, as I stated earlier, we believe that the available evidence runs counter to the contention that the CRA contributed in any substantive way to the current mortgage crisis.

The Boston Fed’s position has long been — despite some determined mischaracterizations — that some flexibility in underwriting criteria may be appropriate if the borrower’s willingness and ability to handle the debt can be affirmed, and such flexibility is considered in a consistent and fair manner across applicants.

We have not, and do not, advocate for irresponsible or poorly underwritten lending. That perspective, however, is not at odds with advocating that the various participants in housing markets continue to strive for fair access to credit, appropriately extended. Nor is it at odds with our belief that responsibly underwritten loans to borrowers in low- and moderate-income areas — including those whose credit situation is considered “subprime” but can document their ability to afford the loan — are welcome and indeed crucial.

We continue to encourage lenders and mortgage servicers to work constructively with borrowers at risk of default and to consider prudent workout arrangements to avoid unnecessary foreclosures. As you know, the Federal Reserve believes that prudent workout arrangements that are consistent with safe and sound lending practices are generally in the long-term best interest of both the financial institution and the borrower.

Furthermore, we are working to finalize the proposed amendments to the rules under the Home Ownership and Equity Protection Act that we proposed in December...Our proposal includes key protections for higher-priced mortgage loans secured by a consumer's principal dwelling and addresses concerns about a lender's assessment of a borrower's ability to make the scheduled payments, including verification of the consumer's income and assets. The proposal also addresses concerns about prepayment penalties and the adverse impact on consumers of lenders failing to escrow for taxes and insurance. Protecting consumers also has benefits for lenders because it should reduce delinquencies and defaults that can occur when consumers do not understand or cannot afford certain types of loans.

As noted earlier, the rapid rise in delinquencies for home equity lines and junior liens held at banks is occurring despite an unemployment rate of about 5 percent – so, should the unemployment rate rise and housing prices continue to fall, financial stresses caused by the housing correction could well spread beyond the large banks involved in complex securitizations, and the smaller banks with sizeable portfolios of construction loans, to a larger set of financial institutions. 

I think we’ll have a long period of anemic economic activity, it’ll take a while as bank and lending officers tighten their criteria. But it doesn’t mean we’ll have a recession.

From Q&A as reported by the Wall Street Journal economics blog.

We saw a debauching of the credit system. To correct that, financiers, whether they be banks or homeowners, will be more cautious as they proceed.

As reported by Market News International

We have taken some very strong steps to make sure that people have flexibilty thats necessary to deal with re-financing, to deal with the potential payment shock that can come from an interest rate reset.

From Q&A as reported by Market News International

We have been pushing [mortgage servicers] to help more struggling homeowners avert foreclosure. It is our feeling, I will state very bluntly, that not enough is being done.

[The Fed is] pushing the industry to consider principal writedowns on these loans, and we have met with a lot of resistance.

As reported by Bloomberg News