Federal Reserve Board chairman Ben Bernanke said he is dismayed by the persistence of high foreclosure rates, declining home values, and the futility of government efforts to engineer a recovery in the housing market.

The Fed chief told the Senate Banking Committee that the Treasury Department has been very innovative in devising loan modification and other programs to address foreclosures. "There have been sincere government efforts to address the problem but they run into lots of bureaucratic and other difficulties," Bernanke testified Friday morning.

"Particularly in a world where unemployment is 10%, it is very difficult to find a solution," he said. (On Friday the government said the national unemployment rate had fallen slightly to 9.4%.)

He noted that the high level of vacancies is reducing the value of the neighboring homes, and driving down prices, which is "affecting household wealth, consumer spending and confidence."

In conducting stress tests on banks, Fed examiners are reviewing the impact falling home prices will have on mortgage portfolios and capital positions.

"One of the main stressors is what happens if house prices were to fall 5%, 10%, or 15% more," he said.

Bernanke said he has advocated for principal reductions as a way to "create incentives for homeowners to stay in their homes."

Sen. Jeff Merkley, D-Ore., pointed out that the latest Federal Housing Administration (FHA)principal reduction program has not gained much traction.

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