Speaking Monday night at the Columbia Business School's 32nd annual dinner, Bernanke said the rate of foreclosures will likely increase in 2008 and that traditional anti-foreclosure steps may not be work to prevent them. He also said sharp declines in home prices can have a negative impact on the overall economy.

"High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets, and the broader economy," he said. "Therefore, doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It's in everybody's interest."

He said government-sponsored enterprises Fannie Mae and Freddie Mac should raise more capital and "could do more" to help ease the crisis. He also called for clear disclosures of home-loan modifications.

"Additional government policies can help address problems in the mortgage markets," he said. "The Congress can take an important step by moving quickly to reconcile and enact legislation permitting the Federal Housing Administration (FHA) to increase its scale and improve its management of risks."

Bernanke also said the best solution is sometimes a mortgage writedown.

Bernanke did not comment on the outlook for interest rates.

By Stephen Huebl, This email address is being protected from spam bots, you need Javascript enabled to view it