This is quite extraordinary. The head of the U.S. central bank is asking mortgage lenders to reduce the principal amount owed on delinquent mortgages. Implicitly, he is asking lenders to take a 20 percent to 30 percent haircut on huge portions of their mortgage portfolios. That's how far below the mortgage value many home values have fallen. What other choice does he have? In many markets mortgage banking companies are likely to take at least a 20 to 30 percent hit if they don't alter the terms and foreclose. And foreclosure will throw homes back on the market, which will drive prices down even further. From today's AP story:

One of the suggestions Bernanke made was for mortgage and other financial companies to reduce the amount of the loan to provide relief to a struggling owner. "Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure," Bernanke said.

With low or negative equity in their home, a stressed borrower has less ability -- because there is no home equity to tap -- and less financial incentive to try to remain in the home, he said.

Bernanke acknowledged this idea might be a tough sell to lenders. Lenders, he said, 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," Bernanke said.

Still, Bernanke suggested such longer-term permanent solutions may work better than shorter-term and temporary ones, where the distressed homeowner could find himself in trouble again. "When the mortgage is `under water' a reduction in principal may increase the expected payoff by reducing the risk of default and foreclosure," he said.