In order to prevent more foreclosures, Fed Governor Randall Kroszner said lenders should lower mortgage rates and reduce principal for borrowers whose home prices have dropped below their loan values.
Testifying before the House Financial Services Panel on Wednesday, Kroszner urged Congress to move quickly to reconcile and enact Federal Housing Administration modernization legislation permitting the FHA to increase its scale and improve the management of potential risks borne by the government.
"The fact that many troubled borrowers have properties that are now worth less than the principal amounts remaining on their mortgages suggests that lenders and servicers should give greater consideration to use of principal reductions," he said.
He also said government-sponsored enterprises such as Fannie Mae and Freddie Mac could do more, saying they should "move quickly" to increase their capital.
"As the GSEs expand their roles in our mortgage market, there is a strong need for the Congress to move forward on GSE reform legislation, including the creation of a world-class GSE regulator," Kroszner said.
He also said that interest rate cuts alone were not enough to address the mortgage crisis in the United States.
Kroszner did not comment on the outlook of the economy or financial markets, nor on his outlook for interest rates.
By Stephen Huebl and edited by Cristina Markham