Bernanke Open to Limiting Lending

By Nell Henderson
Washington Post Staff Writer
Thursday, March 29, 2007

Federal Reserve Chairman Ben S. Bernanke yesterday blamed loose lending for the recent turmoil in the mortgage market and told Congress that "it's worth looking at" the idea of creating a law against certain lending practices.

Bernanke, testifying at a hearing of Congress's Joint Economic Committee, said Fed policymakers are likely to hold interest rates steady for a while and are more concerned about high inflation than slow economic growth. Stock prices fell as his comments dispelled many investors' hopes that the central bank was preparing to cut interest rates to bolster a weakening expansion.

The Fed chairman used the hearing to make his first public remarks on why more Americans are falling behind on their mortgage payments and losing their homes to foreclosure, particularly subprime borrowers with poor credit histories, low incomes, no down payments or other factors that put them at higher risk of default. The hearing comes as Congress is trying to assess the causes and figure out what to do in response.

Bernanke's testimony was also his first since a Senate Banking Committee hearing last week, at which panel chairman Christopher J. Dodd (D-Conn.) blamed the subprime mortgage mess on a failure of the Fed and other bank regulators to enforce federal lending laws.

The Fed chairman, without explicitly referring to Dodd's criticisms, countered yesterday that lenders had insufficiently gauged many subprime borrowers' ability to repay mortgages, particularly when their payments increase because of rising interest rates.

"A large increase in early defaults on recently originated subprime variable-rate mortgages casts serious doubt on the adequacy of the underwriting standards for these products," Bernanke said.

His analysis was embraced by Sen. Charles E. Schumer (D-N.Y.), chairman of the Joint Economic Committee, who said he took the Fed chief's words "as a further indication that we must respond on the federal level."

Schumer blamed much of the mess on mortgage brokers who deceive home buyers into taking on loans they cannot afford, making it more likely that they will lose their home to foreclosure, a practice called predatory lending. He said he will introduce a bill to establish a national system for regulating lenders and to set standards to prevent predatory lending.

Mortgage lenders are subject to a patchwork of federal and state oversight, and the Fed has enforcement power only over the banks it regulates, Bernanke said. He added that the Fed "needs more clarity" on its authority to regulate non-bank subsidiaries of banks and bank holding companies.

This lack of clarity, he said, "bears on the question of whether you want to go to a federal predatory-lending law. I think it's worth looking at."

Several Republicans on the Joint Economic Committee questioned whether more regulation or tighter lending standards would help. Rep. Ron Paul (R-Tex.) said Congress turns too quickly to additional regulation as a solution to any financial problem. "I don't buy into that," he said.

Bernanke said the Fed expects the economy to expand moderately in coming months. And he suggested that the Fed sees no need to cut or raise interest rates. "The current stance of policy is likely to foster sustained economic growth and a gradual ebbing" in inflation, excluding volatile food and energy prices, he said.

But, he added, the Fed has become more uncertain in recent weeks about that forecast. One risk, he said, is that "the correction in the housing market could turn out to be more severe than we currently expect, perhaps exacerbated by the problems in the subprime sector."

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