Fed chief sees limited damage from U.S. mortgage woes
By Jeremy W. Peters
Published: May 17, 2007
NEW YORK: Ben Bernanke, the Federal Reserve chairman, helped soothe concerns that problems in the subprime mortgage market would spread, saying Thursday that the Fed saw “no serious broader spillover.”
In a speech at the Federal Reserve Bank of Chicago, Bernanke also appeared skeptical of tighter regulations for mortgage lenders by the Fed or by Congress.
The speech was Bernanke’s first extended remarks on U.S. subprime mortgage troubles, which have implications beyond homeowners with weak, or subprime, credit histories.
As more and more subprime lenders have filed for bankruptcy in the face of rising homeowner defaults, credit is becoming harder to attain for many Americans. Some economists fear this belt-tightening by mortgage lenders could spread beyond the subprime market and harm consumer spending.
Though the Fed expects foreclosures and delinquencies to continue rising, Bernanke said he thought the damage had so far been limited and was likely to stay that way.
“The vast majority of mortgages, including even subprime mortgages, continue to perform well,” he said. “Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.”
As the housing market exploded, one of the effects was the widespread availability of mortgages. Lenders relaxed their standards and gave mortgages - at higher rates - to people with incomes and credit that would have ordinarily disqualified them from receiving a loan.
Defaults among subprime borrowers have been rising, leaving the institutions that gave credit out so freely in jeopardy. In Washington, there have been calls from top Democrats to more tightly regulate mortgage lenders.
Senator Charles Schumer, a Democrat from New York, who heads the House-Senate Joint Economic Committee, and Representative Barney Frank, a Democrat of Massachusetts, who heads the House Financial Services Committee, have each outlined plans that take aim at predatory lenders.
But Bernanke broadly warned against tighter lending regulations, saying that they can have the unintended consequence of cutting off credit to too many people.
“Rules are useful if they can be drawn sharply,” he said. “Sometimes, however, specific lending practices that may be viewed as inappropriate in some circumstances are appropriate in others.”
He said the Fed’s primary role in preventing loan abuse was by making sure that lenders properly disclose all the conditions and risks associated with mortgages. Beyond that, he said, the Fed can offer guidance to financial institutions as they devise loan practices. But he was cautious about issuing any new rules.
“We must be careful not to inadvertently suppress responsible lending or eliminate refinancing opportunities for subprime borrowers,” he said.
Japan’s economy cooled in the first quarter as companies cut spending on concern that exports to the United States would slow, Bloomberg News reported from Tokyo.
The central bank kept its benchmark interest rate unchanged at 0.5 percent.
Gross domestic product grew at an annual 2.4 percent rate in the three months ended March 31, the Cabinet Office said in Tokyo on Thursday.
Consumer spending rose more than expected and may cushion the economy from waning growth in the United States, Japan’s largest export market.
