Ben Bernanke, the Chairman of the US Federal Reserve, yesterday urged America’s lenders to respond vigorously to its housing crisis by cutting the size of some outstanding home loans.

Mr Bernanke said that a recent industry-wide move to freeze interest payments on some variable-rate mortgages that had been due to be reset at a higher rate had helped to avert some foreclosures, but added that “more can and should be done”.

He said that cutting the size of loans would be a more effective way to reduce defaults than freezing interest rates, partly because homeowners with “negative equity” lack incentive to keep up loan payments.

Addressing the Independent Community Bankers of America conference in Orlando, Florida, Mr Bernanke said: “Lenders tell us that they are reluctant to write down principal. They say that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again.”

He added: “Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.”

Mr Bernanke’s comments illustrate just how alarmed Washington is by the housing crisis, going beyond the stance taken by the Bush Administration. They are also stronger than a report to Congress by the Federal Reserve on February 27 that merely called on lenders to modify some mortgage terms and repayment schedules.

The comments come as the housing crisis goes from bad to worse. Last week, data showed that the average US house price slid almost 9 per cent in 2007’s fourth quarter, compared with a year earlier, the steepest decline in 21 years. It also emerged last week that US homes repossessed by banks almost doubled in January to 45,327 as borrowers failed to keep up mortgage payments, according to RealtyTrac.

Mr Bernanke said yesterday that “delinquencies and foreclosures will continue to rise for a while longer”.

In addition to an Administration-led move by lenders to freeze interest payments on some mortgages, the Administration is providing a $150 billion “economic stimulus”. Much of it will be in tax rebates and one aim is to help people to keep up mortgage payments.

Economists expect the Fed to keep lowering the interest rates to reduce the cost of borrowing, boost the economy and prop up the housing market.

The Federal Open Market Committee is expected to cut the benchmark interest rate by 0.75 per cent at or before its next meeting on March 18.

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