By JEANNINE AVERSA

AP Economics Writer

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WASHINGTON (AP) -- Federal Reserve Chairman Ben Bernanke is suggesting that policymakers look for ways to encourage a wider range of mortgages geared for low income and other borrowers who have been hard hit by the housing slump and credit crunch.

Bernanke, in a letter to Sen. Charles Schumer, D-N.Y., that was released Wednesday, said the Fed is keeping close tabs on financial markets and is "prepared to act as needed" to ensure spreading credit problems that have rocked Wall Street in recent weeks don't hurt the economy. It's a message the central bank has been sending as the markets have grown more turbulent.

Foreclosure and late payments have spiked especially for "subprime" borrowers with blemished credit histories or low incomes. Higher interest rates and weak home values have made it impossible for some to pay or to keep up with their monthly mortgage payments. Some overstretched homeowners can't afford to refinance or even sell their home.

Bernanke said the development of "a broader range of mortgage products which are appropriate for low- and moderate-income borrowers, including those seeking to refinance" might help the situation. "Such products could be designed to avoid or mitigate the risk of prepayment shock and to be more transparent with respect to their terms," Bernanke wrote in the letter, which was dated Monday.

Mortgage foreclosures and late payments are expected to worsen in the next year and a half as low "teaser" rates that lured in borrowers reset to higher rates, socking homeowners. Some 2 million adjustable rate mortgages are expected to reset to higher rates this year and next. Steep penalties for prepaying mortgages have added to some homeowners' headaches.

Bernanke said the Federal Housing Administration, a government agency that insures home loans, might be able to help.

"The Congress might wish to consider FHA reforms that allow the agency more flexibility to design new products and to collaborate with the private sector in facilitating the refinancing of creditworthy subprime borrowers facing large resets," Bernanke said.

The Bush administration is looking into ways that the FHA, part of the U.S. Department of Housing and Urban Development, may help troubled homeowners with low incomes or tarnished credit histories.

Sen. Chris Dodd, a Connecticut Democrat who is seeking his party's presidential nomination, has urged the administration to enable the FHA to "provide more affordable loans to American homeowners in danger of foreclosure due to bad lending practices." Dodd, chairman of the Senate Banking Committee, also is interested in legislation to reform the FHA.

Mortgage giants Fannie Mae and Freddie Mac, meanwhile, "should be encouraged to provide products for subprime borrowers to the extent permitted by their charters," Bernanke said. He didn't give specifics and believed that caps on the two mortgage companies' portfolios need not be raised to accommodate new borrowers.

Schumer has said he plans to offer legislation when Congress returns in September to boost investment caps on Fannie Mae and Freddie Mac "to increase their flexibility to participate in loan modifications with borrowers and lending institutions." So far, the Bush administration has opposed raising the caps. A few years ago, the two mortgage giants suffered multi billion-dollar accounting scandals.

He also has urged Bernanke and the administration to support a plan in Congress to provide $100 million to nonprofit housing groups to help troubled subprime borrowers refinance their homes.