Fed boss predicts slower growth

Housing will be a drag on economy, Bernanke tells joint committee

March 29, 2007|By Marilyn Geewax | Marilyn Geewax,Cox News Service

WASHINGTON -- The "substantial" downturn in home sales has slowed the U.S. economy and "is likely to remain a drag on economic growth for a time," Federal Reserve Chairman Ben S. Bernanke told Congress yesterday.

Still, Bernanke sees no recession on the horizon. The economy should "continue to expand at a moderate pace," he said, and price inflation may ease even as wages rise.

"The weakness in housing and in some parts of manufacturing does not appear to have spilled over to any significant extent to other sectors," Bernanke told the Joint Economic Committee, made up of Senate and House members. He disagreed with economists, including former Fed Chairman Alan Greenspan, who have suggested the nation's six-year expansion may be petering out.

Although some people believe "that expansions die of old age," Bernanke said, "I don't think the evidence really supports that. If we look at history, we see that the periods of expansions have varied considerably. Some have been quite long."

So with the economy continuing to grow at roughly 2 percent a year, Bernanke suggested the Fed probably would keep interest rates steady, too. "The current stance of policy is likely to foster sustained economic growth and a gradual ebbing in core inflation," he said.

Many Wall Street investors were disappointed to hear interest rates probably won't decline soon. They responded by sending stock prices down; the Dow Jones industrial average, the Standard & Poor's 500 index and the Nasdaq composite index all tumbled about 0.8 percent.

Even though Bernanke gave them a fairly upbeat report, many lawmakers peppered him with questions about one of their growing worries: "deceptive" subprime mortgages.

These mortgages are aimed at people with poor credit scores or irregular income. Typically, they include very low "teaser" rates, but monthly payments rise over time. Many of the borrowers now being hit with higher payments say they were not adequately warned about the risks.

"When so many mortgage brokers are able to deceive our most vulnerable families into loans that they could never afford, without anyone batting an eye, [then] the system is broken," said the committee chairman, Sen. Charles E. Schumer, a New York Democrat.

Rep. Carolyn B. Maloney, also a New York Democrat, told Bernanke that "in each of our districts, our constituents are encountering payment shock as their subprime loans reset to much higher rates."

Bernanke conceded that delinquent mortgage payments "have climbed sharply in recent months," but he defended the regulators who oversee lending, saying they are trying to craft tighter mortgage rules that will fix problems without discouraging legitimate lending.

"We have to make the rules extremely precise" so that lenders can offer mortgages without worrying about getting hit with lawsuits, he said. Otherwise, he said, "we'd be probably killing the market, because there will be so much legal uncertainty associated with lending."

As an example of how things can go wrong, he pointed to the Georgia Fair Lending Act of 2002, which allowed that state's borrowers to sue not only the original lender but any entity that subsequently purchased the mortgage as part of a pool of mortgages. Within months of the law taking effect, many lenders and secondary-market participants had ceased doing business in Georgia.

The law "meant that anyone who bought the loan had the same liability as the originator of the loan," Bernanke said. "That had some significant effects on the ability of lenders in Georgia to securitize those loans to ultimate investors."

In 2003, the Georgia General Assembly amended the law to weaken the provision that had scared off lenders.

In the past week, Congress has held two hearings on subprime lending, which has become a hot topic as constituents complain about soaring mortgage payments.

Between 2003 and 2005, when interest rates were falling and home prices rising, lenders began promoting subprime mortgages so intensely that their prevalence among all mortgages jumped from 9 percent to 19 percent, according to the Federal Deposit Insurance Corp.

About 14 percent of subprime mortgage payments are 60 or more days past due now, which means tens of thousands of Americans could be faced with losing their homes.

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