money funds began to worry about the liquidity of their assets, like asset - backed commercial paper, and when households and businesses tried to use their perceived liquidity, the resulting fire sales accentuated asset price declines and transmitted problems from one sector to another. the initial problems from the excessive risk buildup were exacerbated by the deleveraging that followed, including in the financial sector. although there are many reasons that the deleveraging process has been so painful, one of the defining characteristics has been a sharp increase in uncertainty. uncertainty is an aspect of every crisis, but it escalated to such an extreme degree in the summer of 2007 in response to an unexpected decline in housing prices that the financial system, which had been unusually stable and resilient, was pushed into a zone of increasing instability that in turn triggered an adverse feedback loop between the financial sector and the economy. the views expressed are my own and do not necessarily reflect the views of the other members of the board of governors. matthew pritsker of the board's staff contributed to these remarks. risk had been mispriced, but by how much? who was vulnerable? would the markets and the economy overshoot or return to a more sustainable relationship? financial market participants didn't know the value of assets, the financial health of counterparties, or the likelihood that they themselves would be subject to unexpected hits to their capital or liquidity, for example, from ostensibly off - balance - sheet entities. the result was a hoarding of capital and liquidity, a sharp increase in risk premiums, and a generalized flight to liquidity and safety that only gathered momentum as instabilities in the economy and financial markets fed off each other. the characteristics of the networks and the instruments accentuated the uncertainty. the instruments and the relationships among the institutions had become much more complex and opaque. the complexity of the instruments meant that investors did not understand the risk characteristics of the assets they were buying ; among other problems, they relied on credit rating agencies for due diligence. the complexity of the networks meant that participants did not understand how reliant they had become on a few large core institutions and how those institutions were entwined with each other in very complex ways ; when vulnerabilities started to become evident, market participants became worried about who their counterparties were exposed to. in sum, financiers were taking on more risks than they would like to, and in many respects they did not understand

risk - based premiums for mortgage refinancing – in a way that does not increase the expected cost to the taxpayer – would allow the fha to help more troubled borrowers. a concern about such an approach is that servicers might refinance only their riskiest borrowers into the fha program. a combination of careful underwriting, the use of risk premiums, and other measures ( for example, a provision that would allow the fha to return a mortgage that quickly re - defaults to the servicer ) could help mitigate that risk. there are, no doubt, tax - related, accounting, and legal obstacles to expanding the use of principal writedowns. for example, investors in different tranches of mortgage - backed securities may not benefit equally, securitized trusts may not be permitted to acquire new equity warrants, and principal writedowns may require a different accounting treatment than interest rate reductions. but just as market participants, with the help of regulators, obtained greater clarity on the use of interest rate freezes through guidelines issued by the american securitization forum, industry and regulator efforts could also help clarify how this alternative type of workout might be effectively applied. federal reserve system efforts i would like to comment briefly on federal reserve system efforts to reduce preventable foreclosures and their costs on borrowers and communities. the federal reserve can help by leveraging three important strengths : our analytical and data resources ; our national presence ; and our history of working closely with lenders, community groups, and other local stakeholders. a major thrust of our efforts is sharing relevant and timely data analysis of mortgage delinquencies with community groups and policymakers to efficiently target resources to areas most in need. for example, we recently assisted neighborworks america in identifying regions and neighborhoods that are at risk of higher rates of foreclosure and could benefit from increased mortgage counseling capacity. on the basis of this analysis, neighborworks recently distributed $ 130 million in newly granted funds from congress to thirty - two state housing finance agencies, eighty - two community - based neighborworks organizations, and sixteen counseling intermediaries around the country. the federal reserve system also is supporting efforts to reach troubled borrowers and to raise awareness in communities about ways to prevent foreclosures. since july, the community affairs groups across the federal reserve system have sponsored or cosponsored more than fifty events related to foreclosures, reaching more than 4, 000 attendees including