By Les Christie  

NEW YORK  — The wave of foreclosures sweeping the nation are driven in part by a nearly unprecedented decline in home prices and require a concerted government and private-sector response, Ben Bernanke, chairman of the Federal Reserve, said Monday.

“Realistic public- and private-sector policies must take into account the fact that traditional foreclosure avoidance strategies may not always work well in the current environment,” Bernanke said in a speech before the Columbia School of Business.

Bernanke’s comments come as concern about the housing crisis and debate about how to help homeowners in trouble is growing.

Foreclosure filings of all kinds - delinquency notices, auctions sale notices and bank repossessions - were up 112% during the first three months of 2008 compared with the same period a year ago. Community advocates and policy makers are worried that the problem will worsen as the interest rates on as many as 1.8 million mortgages reset this year.

“High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets, and the broader economy,” concluded Bernanke. “Doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It’s in everybody’s interest.”

In explaining the forces behind the problem, Bernanke cited the “increasing role” of declines in home values. He unveiled a series of “heat maps” that showed delinquency rates, job losses and home price changes.

Unemployment statistics, according to Bernanke, do not explain the increased delinquencies of many areas, including California, Florida and parts of Colorado, where foreclosure filings have increased even when unemployment generally have fallen.

More revealing was the close correlation between declining home prices and high delinquency rates. On the home price decline map, states like California and Florida were drenched in red, indicating the worst losses. On the map revealing the highest foreclosure rates, the same states were also covered in red.

Piggy-back problems

Bernanke pointed to the use of so-called piggy-back loans in helping drive foreclosures. These loans, which required low down payments or none at all, were used with increasing frequency during the bubble years to enable borrowers to purchase homes in high-priced states.

Because of price drops, many of the borrowers are now “upside-down,” meaning they owe more than their homes are worth. Many of the owners had counted on the idea that their home values would continue to soar, increasing their home equity, which they could then tap to pay their bills. Now, they can’t afford to pay off their mortgages and they have no assets to rely on.

In the past, said Bernanke, lenders and companies that service loans were “used to dealing with mortgage delinquencies related to life events such as unemployment or illness. . . . A widespread decline in home prices, by contrast, is a relatively novel phenomenon, and lenders and servicers will have to develop new and flexible strategies to deal with this issue.”

In some cases, such as when the value of a home has fallen below the mortgage balance, a writedown of principal may be the best solution, according to Bernanke, although, he added, to be effective they must be targeted to cases facing the highest risks of foreclosure.

What Washington can do

Bernanke outlined the steps that the Federal Reserve was taking to try to minimize the impact and scope of the foreclosure crisis.

The response includes working with community groups trying to acquire and restore vacant properties; encouraging lenders and mortgage servicers to work with at-risk borrowers; and developing new lending standards to prevent some of the abusive lending practices of the past from continuing.

The Fed, according to Bernanke, has worked closely with the Hope Now alliance - an industry foreclosure-relief effort spurred on by the Bush administration - to support help for troubled borrowers, develop protocols to standardize loss-mitigation approaches and improve reporting standards.

Bernanke also threw his support behind the expanded use of the Federal Housing Administration (FHA) and government-sponsored enterprises such as Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) to address problems in mortgage markets.

Opening up the lending markets has already helped thousands of at-risk borrowers to refinance into lower cost loans and save their homes, Bernanke said.

But with more than 156,000 families who lost their homes during the first three months of the year and with as many as 1.8 million adjustable rate mortgages scheduled to reset to higher rates this year, there’s still much work that needs to be done, he said

(Reporting by Jonathan Stempel; Editing by Andre Grenon)

Warren Buffett, the world’s richest person, said on Sunday the U.S. economy is in recession, “as I define it.”

Buffett’s comment was at odds with a U.S. Commerce Department report last week showing the economy grew at a 0.6 percent annualized rate in the first quarter.

“The U.S. is in recession as I define it,” Buffett said at a news conference. “I would define that as a situation where people are doing less well than they were three months, six months or eight months earlier and most businesses find themselves in that position too.

“If were are in a non-recession, I don’t think people want to see it going in the same direction as it is and saying it’s wonderful,” Buffett added.

Jose Canseco, the former AL MVP who made millions during his baseball career, has had his home foreclosed.

Canseco told the syndicated TV show “Inside Edition” that he walked away from his $2.5 million, 7,300-square foot home in suburban Encino because it didn’t make sense to continue making payments.

“I do have a judgment on my home and it to me is very strange because it didn’t make financial sense for me to keep paying a mortgage on a home that was basically owned by someone else,” he said in an interview that aired Thursday.

“You know my life, this financial thing, is a very complicated issue. Obviously, when you make all that money, people think, `OK, let’s assume it is $35 million.’ People have to understand that $35 million, you’re paying the government 41 percent. That leaves you with about $17 or $18 million, not even. Then you’re taking care of your whole family.”

He added that a couple of divorces cost him $7 million or $8 million.

Canseco said his top earnings year was $6 million and that his financial situation obviously is different than most people who are losing their homes.

“What about other families that we’re hearing on TV, that they’re saying, `We have nowhere else to go,’” he said. “I mean, that is amazing. I’ve got books (he’s put out two expose-type books on drug use in baseball), we’re now trying to produce the movie to both.

“Like I said, my situation was a little more different than most. I decided to just let it (the house) go, but in most cases and most families, they have nowhere else to go.”

By PETER S. GOODMAN and MICHAEL M. GRYNBAUM

The unemployment rate surged to 5 percent in December as the economy added a meager 18,000 jobs, the smallest monthly increase in four years, the Labor Department reported on Friday.

Economists viewed the report as the most powerful indication to date that the United States could well be falling into a recessionary downturn. Evidence of widening unemployment heightened anticipation that the Federal Reserve would further cut interest rates this month, perhaps by an unusually large half a percentage point, in a bid to prevent the economy from sliding into the muck.

“This is unambiguously negative,” said Mark Zandi, chief economist at Moody’s Economy.com. “The economy is on the edge of recession, if we’re not already engulfed in one.”

A recession is typically defined as an extended period of at least several months during which economic activity shrinks and unemployment rises.

The swift deterioration in the job market resonated as a warning sign that troubles once confined to real estate and construction are spilling into the broader economy, threatening the ability of American consumers to keep spending with customary abandon.

On Wall Street, the report led to a big sell-off that sent the Dow Jones industrial average plunging nearly 2 percent.

As the presidential race heated up, Democrats seized upon the bleak job numbers to indict Republican-led economic policies. “This morning’s jobs report confirms what most Americans already knew,” Nancy Pelosi, the House speaker, said in a statement. “President Bush’s economic policies have failed our country’s middle class.”

President Bush cautioned that “we can’t take economic growth for granted” and said he would work with Congress to be “more diligent” on protecting the economy. Speaking to reporters at the White House after a meeting with his economic advisers, Mr. Bush warned that “the worst thing the Congress could do is raise taxes on the American people.”

The lone consolation for investors, workers and the public at large was that the bad news seemed severe enough to prod the Fed to push its benchmark rate below its current 4.25 percent when policy makers meet at the end of the month. Lower interest rates decrease borrowing costs and encourage banks to lend more freely, spurring spending, hiring and investment.

The Fed has already eased rates three times since September in a bid to inject confidence into jittery markets. But analysts cautioned that central bankers may now feel constrained against further easing: inflation is growing, particularly as oil hovers near $100 a barrel. Lower interest rates, over time, can generate the seeds of inflation, and could make an already weak dollar worth less against foreign currencies.

“The Fed is trying to juggle a two-sided sword,” said Ryan Larson, senior equity trader at Voyageur Asset Management. “They’re trying to fight inflation moving higher and they’re trying to fight a slowdown in growth.”

In an effort to encourage lending, the Fed has been pumping cash through the banking system by auctioning off loans at discounted rates. On Friday, it said it would expand a pair of auctions scheduled for this month, offering $30 billion.

Some economists said the markets and other analysts were making too much of a lone jobs report that could yet be revised.

“The stock and bond markets are going into panic mode,” said Michael Darda, chief economist at MKM Partners, a research and trading firm in Greenwich, Conn. “We’re going to have a slowdown, but I don’t think we’re going to have a recession.”

While filings for jobless benefits have been rising in recent weeks, the pace has not been swift enough to justify such a sharp jump in the unemployment rate, Mr. Darda added.

For months, the economy had managed to grow vigorously despite worrying developments, from the unraveling of the housing industry to turmoil in the credit markets. Through it all, economists marveled at the resilience of the labor market, suggesting that as long as the economy kept creating jobs by the tens of thousands each month, Americans would keep spending and growth would carry on.

But the jobs report for December suggested that the negatives dogging the economy finally appear to be dragging it down.

“There’s no mystery as to why the unemployment rate went up,” said Robert A. Barbera, chief economist at the research firm ITG. “The mystery is why it took so long.”

December’s addition of 18,000 jobs to nonfarm payrolls was an abrupt drop from the 115,000 created in November — a figure revised on Friday from an initial estimate of 94,000. It put the annual rate of job growth at its lowest since 2004.

Some areas of the economy continued to expand, according to the report. Government jobs grew, and health care added 28,000 jobs. Food services added 27,000.

But that growth was largely reversed by pain elsewhere. Retailing lost 24,000 jobs in December. Financial services lost 7,000. Construction shed another 49,000 jobs. Even commercial construction, which some have suggested could compensate for woes among home builders, lost 17,000 jobs. Over all, private sector jobs slid by 13,000.

Despite a weak dollar, which has helped compensate for disappointment at home by lifting American sales abroad, the nation shed 31,000 manufacturing jobs in December.

For the third consecutive month, wages grew slower than the pace of inflation, cutting into the real income of many workers. Among rank-and-file workers, who make up more than four-fifths of the labor force, average hourly earnings rose 3.7 percent last year, below the 4.3 percent rise in 2006.

Job growth has been slowing steadily for two years. In 2005, the economy generated 212,000 new jobs a month, according to the Labor Department. Last year, the pace dropped to 122,000.

The spike in the unemployment rate, which was 4.7 percent in November, suggested that the deterioration of the job market is now accelerating.

Last year, companies fretted about business prospects amid falling housing prices and tightening credit. Many stopped hiring, but large-scale layoffs were rare. But now, some appear to have concluded that they can no longer tough it out.

“December’s bleak jobs report represents the siren call that this business cycle is just about over,” declared Bernard Baumohl, managing director at the Economic Outlook Group, in a note to clients. “We’re about to tilt over to the other side of the economic curve and begin the downsizing.”

In Penacook, N.H., the tilt came during the Christmas season: Riverside Millwork, a supplier of windows, doors and stair parts, laid off 43 people. That added to a wave of layoffs that has winnowed the staff from 225 to 40 since October 2005, when home building began its decline.

“We’ve cut just about everything that we can possibly cut,” said Larry Byer, the company’s human resource manager. “When you don’t have assets to sell or to keep you going, the bodies have to go.”

In calculating the rate of job growth, the Labor Department relies upon a sampling of payroll data and an extrapolation of how many jobs have been created and destroyed. An accompanying survey of households, used to calculate the unemployment rate, presented an even bleaker picture, showing that the number of Americans saying they were working plunged by 436,000 in December — the worst number in five years.

The trend was pronounced for teenagers, blacks and Hispanics, with unemployment among those groups jumping 0.6 percentage point, triple the increase for whites.

The household survey is notoriously volatile and treated with skepticism. But unlike the payroll data, it is not subject to revision, other than for seasonal factors, making it a better indicator when the economy is on the cusp of change, Mr. Barbera said.

Between December 2005 and December 2006, the household survey showed jobs increasing by 2.2 percent. Over the last year, jobs grew less than 0.2 percent.

“Every time we’ve gotten down to this level since 1956, there’s been a recession,” Mr. Barbera said.

The risk is that the weakening job market will swell from a symptom of malaise to a cause. As fewer jobs are created, spending power could dry up. Faced with declining business, employers could further trim payrolls. As unemployment grows, more homeowners could fall behind on mortgages, leading to more losses at banks, and more layoffs.

“The risk of a vicious cycle setting in now is very high,” Mr. Zandi said. “The job market’s operating at stall speed. Either it picks up soon or it quickly unravels.”