Fed Chairman Warns of More Foreclosures

By Nell Henderson
Washington Post Staff Writer
Friday, May 18, 2007

Americans are likely to fall behind on their mortgage payments and lose their homes to foreclosure at a higher rate this year, but that probably will not hurt the nation's economy significantly, Federal Reserve Chairman Ben S. Bernanke said yesterday.

The recent rise in mortgage delinquencies and foreclosures has been concentrated in the market for adjustable-rate loans made to subprime borrowers, who have spotty credit histories, low incomes or other factors that put them at higher risk of default, Bernanke said in a speech delivered in Chicago.

For such mortgages, the rate of serious delinquencies -- those loans in foreclosure or with payments 90 days or more overdue -- rose sharply last year and recently reached about 11 percent, double the level of mid-2005, he said, citing data from First American LoanPerformance.

That figure is likely to climb over the next 18 months as the interest rates reset higher on many adjustable-rate loans, Bernanke said.

But, he said, "we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system," according to the text of his remarks. While some subprime lenders have closed or entered bankruptcy proceedings, the problems in that market are not hurting banks or thrift institutions, he said.

Many economists, including those at the Fed, have modestly lowered their forecasts for U.S. economic growth this year because of the downturn in home building and sales. The plunge in residential construction alone shaved a percentage point off the growth rate in the first three months of the year, to a sluggish 1.3 percent annual rate.

Some analysts predict that the troubles in the subprime market, in particular, will deepen and prolong the housing slump, seriously dampening economic growth into next year.

Bernanke's predecessor, Alan Greenspan, said yesterday that the subprime market's problems will bring a "continued period of weakness" to housing, making it difficult to forecast economic growth over the next year, Bloomberg News reported.

But Bernanke, who succeeded Greenspan in February 2006, noted that most mortgages, including most subprime mortgages, are performing well, and the appreciation of home values during the housing boom has left most homeowners with big gains in home equity. And he said "growth in jobs and incomes should help keep the financial obligations of most households manageable."

However, Bernanke also suggested that the Fed and other federal banking regulators may need to do more to protect consumers from deceptive and abusive lending practices, which appear to have contributed to the subprime market turmoil.

"The Federal Reserve, other regulators, and Congress must evaluate what we have learned from the recent episode and decide what additional regulation or oversight may be needed to prevent a recurrence," he said.

But he also cautioned that any additional legal action should not go overboard. "We do not want to curtail responsible subprime lending or close off refinancing options that would be beneficial to borrowers," he said.

Bernanke's speech was his most extensive commentary on the turmoil in the subprime market since some U.S. senators alleged that the Fed contributed to the crisis by lax oversight of lenders.

"It's good news that Chairman Bernanke and the Fed may finally be cracking down on abusive lending in the housing market later this summer," Sen. Charles E. Schumer (D-N.Y.), chairman of the congressional Joint Economic Committee, said in a written statement. "But we must take action today to stem the tide of foreclosures sweeping through our neighborhoods."

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