The Federal Reserve has outlined a proposal to help the housing industry recover from the effects of the subprime meltdown. Feds chairman Ben Bernanke expressed the central bank's plan Friday and commits itself to alleviate the mortgage crisis.

In a speech at the annual meeting of the National Community Reinvestment Coalition, Bernanke mentioned that the Feds is working to control unfair lending practices to give protection to borrowers of ARMs.

"The Federal Reserve is strongly committed to fully employing our authority, expertise, and resources to help alleviate distress," Bernanke said in written remarks.

Bernanke outlined four action points to that the Fed wants implemented improve the situation:

Prohibit lenders from issuing loans that borrowers cannot repay. This is to help homeowners who could not afford the higher rates once an ARM resets its rates to a much higher rate than the low initial rates when they took on the loan. Many homes were foreclosed and are in the process of foreclosure as a result of the resetting of interest rates.

Make lenders verify the income and assets of the borrower. Often called "stated income" lending, lenders would issue credit approvals for borrowers with poor credit or insufficient income to repay a loan.

Require escrow accounts for higher-priced loans. For borrowers who do not understand the scope of repaying loans, the Fed suggests higher-priced loans have a separate account for real estate taxes and hazard insurance, which is standard in prime lending.
Ban repayment penalties including "loan-flipping." The Fed proposes to ban schemes in which lenders force borrowers to refinance at a higher rate that they cannot afford.

"Our goal was to produce clear and comprehensive rules to protect consumers from unfair practices while maintaining the viability of a market for responsible mortgage lending," said Bernanke.

The plan is really to make sure that the homeowners/borrowers can repay their loans without getting into trouble with increased interest rates brought about by resetting or refinancing.