In recent days, both have spotlighted the vital role of housing in the overall economic picture. In doing so, they agree that a robust U.S. recovery is impossible without lifting residential sales, home prices and easing the foreclosure crisis substantially.

“Both residential sales and construction remain depressed,” Bernanke said in prepared testimony Thursday before the U.S. House Budget Committee. “A persistent excess supply of vacant homes, largely stemming from foreclosures, is keeping downward pressure on prices and limiting the demand for new construction.”

Bernanke’s reference to the housing market drew a statement of support from the National Association of Realtors (NAR).

“We fully support Chairman Bernanke’s comments that the lack of available and affordable mortgage financing, low home values and high foreclosure inventories are inhibiting a meaningful housing market recovery,” said NAR President Moe Veissi.

Veissi said there is more that Congress and the president can do to address the lack of  “available and affordable mortgage financing to creditworthy borrowers” and stem the rising inventory of foreclosed homes.

Bernanke’s comments came before a contentious hearing led by Committee Chairman Paul Ryan, R-Wisconsin, who suggested that the Fed may want to allow higher inflation to fulfill the other part of the central bank’s congressional mandate – promoting job growth.

The Fed last month set a 2 percent annual inflation goal after saying that it would keep its benchmark federal funds interest rate at near zero through 2014.

Bernanke said the Fed is not seeking, nor would it tolerate, higher inflation. He told lawmakers that they should focus on reducing the deficit.

But Ryan and other lawmakers have criticized Bernanke for treading on their territory, particularly providing possible solutions to housing woes. Last month, that criticism peaked when Bernanke presented congressional leaders with a white paper entitled: “The U.S. Housing Market: Current Conditions and Policy Considerations.”

The Fed’s paper offers several scenarios for easing the foreclosure crisis, although they involve higher short-term risks for Fannie Mae and Freddie Mac, the taxpayer-subsidized mortgage financing companies.

In a whirlwind of activity in recent days, the Obama Administration has responded – although not directly to the Fed’s white paper – with proposals to help distressed homeowners and address the questionable actions of lenders in processing mortgage securities.

On Feb. 1, Obama unveiled a sweeping new refinancing plan to help millions of “underwater” homeowners save $3,000 a year on average – if Congress approves his program with a price tag of $5 billion to $10 billion.

A week before, U.S. Attorney General Eric Holder said that 11 financial institutions were recently issued subpoenas related to a newly expanded federal-state effort to crack down on misconduct in the mortgage-backed securities market.

And this past week, New York Attorney General Eric Schneiderman said his state has sued the largest U.S. banks – Bank of America, JPMorgan Chase and Wells Fargo – charging that the private “mortgage electronic registry system,” known as MERS, has resulted in deceptive and fraudulent foreclosure filings.

Meanwhile, this coming week could finally see a settlement – as high as $25 billion – between states and the nation’s top lenders over improperly processed foreclosures, the nationwide probe triggered by the “robo-signing” of affidavits.

In the final stretch, immunity for the banks against future legal actions has emerged as a key issue in the talks that have entered a second year.

The deadline for states to decide whether to join the settlement with banks was delayed to Feb. 6 from Feb. 3, according to the office of Iowa Attorney General Tom Miller, who has been leading the talks.

There has been dissention among state officials who argue that the settlement is too lenient on the lenders: Bank of America, JPMorgan Chase & Co., Citigroup, Wells Fargo and Ally Financial.

One potential hurdle to this issue is limiting immunity for the banks from separate and future mortgage litigation, especially actions taken by affected homeowners. Criminal prosecutions against the lenders may also be left on the table.

The biggest dissenter has been California Attorney General Kamala Harris who has walked away from the talks out of concerns that residents of her state won’t receive proper compensation. The settlement might drop to $19 billion from $25 billion if California doesn’t sign on.

Affected homeowners would get principal write-downs or favorable refinancing terms under the proposed settlement.

About 1 million homeowners who are “underwater” on their mortgages – owing more in mortgage principal than the value of their homes — could be eligible for as much as $20,000 in write-downs.

“All I would say is that we are making good progress there,” said U.S. Housing and Urban Development Secretary Shaun Donovan said Wednesday during a White House briefing.  “I think you know that documents have been shared with the attorneys general.  They are making decisions as we speak.  A number of them have already announced support for it and it will be finalized, I would expect, in the coming days.”

The settlement will also likely include an overhaul of mortgage restructuring procedures to help more homeowners avoid foreclosures.

Borrowers who lost their homes to foreclosure are unlikely to get their homes back or reap much financially from the $25 billion settlement. About 750,000 Americans would be eligible for $1,800 checks, according to media reports last month.

The lawsuit contends that employees and agents of the three banks, serving in the role of “MERS certifying officers,” repeatedly submitted court documents with false and misleading information.

This data made it appear that the foreclosing party had the authority to bring a case when, in fact, it may not have had that power, said a statement from Schneiderman’s office.

In effect, Schneiderman said, the creation and use of MERS is “harming homeowners and undermining the integrity of the judicial foreclosure process.”

Schneiderman’s MERS lawsuit claims that banks saved $2 billion in recording fees by avoiding the public records system. More than 70 million mortgage loans, including subprime loans, have been registered in the MERS system, instead of going through local county clerks’ offices.

The suit claims MERS has effectively eliminated the ability of homeowners and the public to track property transfers through the traditional public records system. This information is now stored only in a private database plagued with inaccuracies and errors – and MERS and its bank certifying officers exercise sole control.

Additional defendants in the suit include BAC Home Loans Servicing, LP, Chase Home Finance LLC, EMC Mortgage Corporation and Wells Fargo Home Mortgage, Inc.

“The banks created the MERS system as an end-run around the property recording system, to facilitate the rapid securitization and sale of mortgages” Schneiderman said. “Once the mortgages went sour, these same banks brought foreclosure proceedings en masse based on deceptive and fraudulent court submissions, seeking to take homes away from people with little regard for basic legal requirements or the rule of law.”

The financial industry created MERS in 1995 to allow financial institutions “to evade local county recording fees, avoid the hassle and paperwork of publicly recording mortgage transfers, and facilitate the rapid sale and securitization of mortgages,” the New York attorney general’s office said.

Schneiderman is co-chair of the newly expanded federal-state effort by the Obama Administration to crack down on misconduct in the mortgage-backed securities market.

Spokesmen for JPMorgan Chase and Bank of America declined to comment to Reuters on the lawsuit. Ancel Martinez, a Wells Fargo spokesman, told Reuters that the company was reviewing the lawsuit and does not have “anything to add at this time.”

Janis L. Smith, a spokeswoman for Merscorp and its subsidiary, MERS, said in a statement that the firms did not violate the law or any mortgage regulations.

“Federal and state courts around the country have repeatedly upheld the MERS business model, and the validity of MERS as legal mortgagee and nominee for lenders,” the MERS statement said. “We refute the attorney general’s claims and will defend the case vigorously in court.”

In the 23 states were a judge has the final say, the foreclosure pipeline has stalled, compared to the 27 states with a non-judicial and quicker process.

Half of all loan holders in foreclosure in judicial states have not made a payment in more than two years, according to the December Mortgage Monitor report released by Lender Processing Services (LPS).  That compares to 28 percent in non-judicial states.

Moreover, foreclosure sale rates in non-judicial states stood at about four times that of judicial foreclosure states in December

But no matter which type of foreclosure proceeding is involved, the overall crisis is dragging on and weighing down on home prices and keeping a housing market recovery from gaining solid footing.

LPS reports that new foreclosures dropped about 40 percent last year, but that sharp decline is attributed to foreclosure freezes and reviews conducted by the top lenders in the wake of the “robo-signing” scandal that broke in late 2010.

Settlement talks between the lenders and 50 state attorneys general continue, with some reports surfacing this past week of a pending $25 billion resolution. But other reports point to discontent among some state leaders. They contend that more relief for wronged homeowners is needed, in addition to more accountability and transparency from the lenders.

A key component of a settlement is whether California Attorney General Kamala Harris will sign on. Thus far, she has called the proposed settlement inadequate. About one-fifth of the nation’s foreclosures are in California.

Now for the good news, according to LPS.

Loans originated over the last two years have proven to be “some of the best quality originations on record,” LPS said.

A result of tighter lending requirements, 2010-2011 loan originations showed 90-day default rates below of all other years – back to 2005.

December origination data also shows that recent prepayment activity – a key indicator of mortgage refinances – has remained strong, with 2008-2009 originations, high credit score borrowers and government-backed loans having benefited the most from recent, historically low interest rates.

The 23 states with court system proceedings are: Connecticut, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Nebraska, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Vermont and Wisconsin.

Federal officials have altered the program in the past to streamline or improve mortgage servicer output and borrower eligibility – while responding to homeowner complaints regarding botched modifications.

The Home Affordable Modification Program (HAMP) has started 909,953 permanent mortgage modifications through November 2011, but another 923,545 attempts at reducing monthly payments have been cancelled, according to the government’s latest figures.

HAMP targeted 3 million to 4 million homeowners, but it lists a pool of only 891,542 eligible delinquent borrowers as of Oct. 31. Meanwhile, cancelled modifications have steadily surpassed those that remain active since the program’s inception in 2009. HAMP is scheduled to end Dec. 31 of this year.

HAMP’s latest enhancements include incentives to Fannie Mae and Freddie Mac, the government-owned mortgage financing giants, to reduce principals on loans for borrowers who are “underwater,” or owe more than the value of their homes. Previously, the government had only offered incentives to private lenders and banks.

Whether Fannie and Freddie accept the Obama administration offer is up to Edward J. DeMarco, acting director of the Federal Housing Finance Agency, which is responsible for minimizing losses to the companies and to taxpayers.

In a written statement, DeMarco said he review potential costs and benefits of participating in HAMP’s principal write-down effort. But he has opposed such a strategy in the past, citing the financial health of the two companies and taxpayer exposure to further instability.

Fannie and Freddie have been granted about $170 billion in taxpayer bailouts. The U.S. Treasury will continue to pick up quarterly losses for the two entities through next year. Fannie and Freddie own or back about half of all U.S. mortgages.

The HAMP changes were announced today in a joint press conference held by Housing and Urban Development Secretary Shaun Donovan, Assistant Treasury Secretary Tim Massad, and White House National Economic Council Director Gene Sperling.

Here’s an overview of the changes:

• Borrowers whose debt ratio is below 31 percent of their incomes may now be eligible for assistance. HAMP was designed for homeowners with a debt ratio above 31 percent.  The new guidelines will consider other debt when calculating debt-to-income ratios.
• Eligibility will be extended to owners of rentals properties: HAMP had applied solely to owner-occupied homes.
• The new incentives would pay between 18 cents and 63 cents for every dollar that lenders take off the mortgage principal, up from between 6 cents and 21 cents.
• Fannie Mae and Freddie Mac do not offer principal reductions in their current HAMP participation. Treasury officials now say they will pay the same principal reduction incentives to Fannie or Freddie, if they allow servicers to forgive some principal in a HAMP modification.

The HAMP program changes are separate from a new refinancing plan for “responsible homeowners” that Obama promised during his state of the union speech this week. That effort will be detailed in coming weeks.

That’s down from 30 percent of all sales in the third quarter of 2010.

The year-over-year percentage decline is mostly attributed to extended reviews by lenders into improperly processed foreclosures – a component of the “robo-signing” investigation by the 50 state attorneys general.

The newly released data shows that third parties purchased a total of 221,536 residential properties in the foreclosure process, or those bank-owned (REO) in the third quarter, down 11 percent from a revised second quarter total and down 5 percent from the third quarter of 2010.

The average sales price of foreclosed or bank-owned homes was $165,322 in the third quarter, up 1 percent from the previous quarter – but down 3 percent from the third quarter of 2010.

That’s 34 percent below the average sales price of homes not in foreclosure, matching the 34 percent discount in the second quarter – but below the 37 percent discount in the third quarter of 2010.

“While foreclosures continue to represent an excellent bargain-buying opportunity for many buyers and investors, foreclosure sales accounted for a smaller share of the total market in the third quarter,” said Brandon Moore, chief executive officer of RealtyTrac. “That trend is not too surprising given the continued ambiguity surrounding proper foreclosure procedures — and the ripple effect that has on sales of foreclosed properties that might have been improperly foreclosed.”

A total of 92,824 pre-foreclosure homes — in default or scheduled for auction — sold to third parties in the third quarter, a decrease of 9 percent from the previous quarter, and nearly matching the 92,967 pre-foreclosure sales in the third quarter of 2010.

But the victims of the “robo-signing” scandal that sparked the multistate foreclosure probe by state attorneys general are likely to get $1,800 checks each under a draft settlement, according to a report by the Associated Press today.

Borrowers who lost their homes to foreclosure are unlikely to get their homes back or reap much financially from the $25 billion settlement. About 750,000 Americans would be eligible for the $1,800 checks.

Some state attorneys general and lawmakers are balking at the proposed settlement for not going after big banks more forcefully.

“We’re urging the Obama administration to stand with homeowners to fight for meaningful settlement,” Sen. Sherrod Brown, D-Ohio told reporters. “No one is above the law.”

The agreement would provide roughly 1 million homeowners a mortgage modification of some sort, including new refinancing terms and principal write-downs for borrowers who are “underwater,” or owe more than the value of their homes.

Mortgage lending guidelines would be eased as well for other homeowners that are not involved directly in the “robo-signing” investigation. Those changes reportedly will ease barriers for restructuring loans for those facing foreclosure.

Iowa Attorney General Tom Miller said in a statement that a deal with the five biggest U.S. mortgage servicers – Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial (formerly GMAC) ­– won’t be reached this week. Miller leads the 50-state bipartisan working group helping coordinate the questionable foreclosure practices.

The lenders are accused of submitting foreclosure documents without verification, or with false representation, or signing certain legal documents outside the presence of a notary public. Authorities say these practices may violate state laws and court rules.

Despite various reports of progress in the talks with the lenders, there is also discontent among some state leaders.

Delaware Attorney General Beau Biden, a Democrat, won’t agree to the proposed foreclosure settlement as currently drafted, Deputy Attorney General Ian McConnel told Bloomberg in a phone interview today.

The settlement amount would drop to about $19 billion if California Attorney General Kamala Harris refuses to sign on, Bloomberg reported.

In September, California Attorney General Kamala Harris backed away from the nationwide foreclosure probe, stating that residents of her state were not being offered sufficient relief.

Massachusetts Attorney General Martha Coakley opted to sue the five banks, charging them with deceptive loan servicing and pursuing illegal foreclosures on properties within that state.

The settlement applies to privately held mortgages, not those held by government-controlled Fannie Mae or Freddie Mac.

Florida is living up to its battleground reputation with the two co-frontrunners for the Republican presidential nomination raising the housing market meltdown as a key topic on this week’s campaign trail.

In a new TV ad today, Romney is  reminding Florida Republicans about Gingrich’s $1.6 million in consultancy payments from the government-backed, mortgage financing firm Freddie Mac.

“While Florida families lost everything in the housing crisis, Newt Gingrich cashed in,” the TV ad says. “Gingrich resigned from Congress in disgrace and then cashed in as a D.C. insider.”

Gingrich called Romney’s claims “desperate baloney.”

Gingrich has denied that he worked as a lobbyist for Freddie since stepping down as speaker in 1999. Gingrich said he was retained by Freddie Mac as a historian, but later added that he’d received consulting fees for providing “strategic advice.”

In attacking Gingrich, Romney hopes to deflect some attention from the topic of his federal tax returns, which the former Massachusetts governor said he would release on Tuesday.

But the beleaguered housing market promises to become an issue that packs a bigger punch before Florida’s primary Jan. 31.

Gingrich’s Freddie Mac connection has hurt the former House speaker somewhat before his convincing win in South Carolina.

But it’s an issue deeply felt in Florida, the state with the second highest number of foreclosure properties in 2011 (24,576) – after California. And few U.S. regions have seen home prices plummet more than South Florida over the past four years.

Freddie Mac and bigger corporate sibling Fannie Mae have drawn about $170 billion in bailout funds from the U.S. Treasury since the two firms were made wards of the U.S. government in September 2008.

Republicans – and many Democrats – have called for the phasing out of Fannie and Freddie and shifting most of mortgage financing to the private sector. The Obama Administration has struggled to strike a balance between overhauling the troubled firms and the need to maintain a stable housing financing structure.

Fannie and Freddie were taken over after massive losses tied to acquisitions of private-label and subprime-mortgage backed securities. Those faltering mortgages backed by Fannie and Freddie fueled the housing bubble and subsequent financial crisis.

But Congressional mission of both companies is to maintain liquidity for the vital housing industry, ensuring the lenders can continue to finance mortgage loans. Fannie and Freddie hold more than half of all U.S. mortgages.

Last month, the Securities and Exchange Commission charged six former top executives of Fannie Mae and Freddie Mac with securities fraud tied to allegedly misleading statements on the firms’ exposure to faltering subprime mortgages.

But the decline was mostly the result of a growing backlog of foreclosure actions that were delayed as servicers reviewed questionable paperwork – fallout from the “robo-signing” scandal.

Many state authorities continue to investigate the allegedly sloppy paperwork, in many cases signed affidavits by lender personnel that contained false or missing borrower information. State attorneys general are seeking a settlement with the lenders in the case.

At least one – Massachusetts Attorney General Martha Coakley – opted to file suit last month against five of the nation’s largest lenders – Bank of America, Wells Fargo, JP Morgan Chase, Citi, and Ally Financial’s GMAC Mortgage unit – charging that banks practiced deceptive loan servicing and pursued illegal foreclosures on properties within her state.

RealtyTrac, the widely cited research firm, predicts that 2012 will see an increase in foreclosure filings as the backlog continues to unravel – though still below the peak of 2010.

Nonetheless, foreclosure activity in 2011 was 33 percent below the 2009 total and 19 percent below the 2008 total.

“Foreclosures were in full delay mode in 2011, resulting in a dramatic drop in foreclosure activity for the year,” said Brandon Moore, chief executive officer of RealtyTrac. “The lack of clarity regarding many of the documentation and legal issues plaguing the foreclosure industry means that we are continuing to see a highly dysfunctional foreclosure process that is inefficiently dealing with delinquent mortgages — particularly in states with a judicial foreclosure process.”

The backlog was still evident for December. Foreclosure filings were reported on 205,024 U.S. properties last month, a decrease of 9 percent from the previous month and down 20 percent from December 2010. December’s total was the lowest monthly total since November 2007 — a 49-month low.

U.S. foreclosures in the fourth quarter took an average of 348 days to complete the process, up from 336 days in the third quarter and up from 305 days in the fourth quarter of 2010.

The length of the average foreclosure has increased 24 percent from 281 days in the third quarter of 2010, when lenders began to re-evaluate procedures as the result of the robo-signing controversy.

The Fed’s most recent economic survey was encouraging, depicting an economy that has made a lackluster by steady rebound from a near re-bottoming in the spring/summer period.

But the optimism ended abruptly in the Fed’s so-called Beige Report when the category of “real estate and construction” came up.

“Activity in residential real estate markets largely held steady at very low levels, with the exception of further increases in the construction of multifamily residences,” the Fed reported. “The pace of single-family home sales remained quite sluggish throughout the country…”

The Fed finding is another reminder of the altered landscape of homeownership emerging out of the housing market collapse. Rental prices are anticipated to continue steady growth throughout 2012, while single-family home prices are seen as finding a bottom before year’s end.

Homeowners who have or will go through foreclosure are helping swell the ranks of renters. Moreover, a sluggish economy with high unemployment is keeping first-time homebuyers – or those “underwater” on their mortgages – from taking advantage of the most affordable single-family market in decades, as mortgage rates remain near record lows.

From the Fed’s report:

“Construction of single-family homes remained at depressed levels in most areas and fell further in some, such as the Philadelphia, St. Louis, Minneapolis, and Kansas City Districts. However, Cleveland reported that activity improved during the past couple of months. In contrast to the soft market for single-family residences, the market for rental units tightened in some areas, such as the New York and Richmond Districts, and construction of multifamily residences rose in the Boston, Philadelphia, Chicago, Kansas City, and Dallas Districts.”

Some districts, such as Boston and Atlanta, noted home sales exceeding levels from twelve months earlier. But those increases were “mainly because the earlier levels reflected a substantial drop following the expiration of the homebuyers’ tax credit in mid-2010.”