Bernanke plays down mortgage-default impact

May 18, 2007|By New York Times News Service

The Federal Reserve does not foresee a broader economic impact from the growing number of mortgage defaults and home foreclosures, its chairman said yesterday. And he cautioned that heavy-handed regulation of lenders could have the unintended effect of adding to the strain on the troubled housing market.

With Congress preparing to take up legislation that would more closely monitor mortgage lending, Ben S. Bernanke contended that any new rules must be narrowly written.

Speaking before the Federal Reserve Bank of Chicago in his most comprehensive remarks yet on the mortgage market's recent problems, Bernanke said regulation must "walk a fine line" between protecting consumers and making sure that people who deserve credit can get it.

"Rules are useful if they can be drawn sharply, with bright lines," he said. "Sometimes, however, specific lending practices that may be viewed as inappropriate in some circumstances are appropriate in others."

Bernanke said the primary role of regulators in preventing abuse should be to make 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 write loan practices and prohibit clear abuse. But he said regulators should be 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.

The push for more scrutiny of lenders comes as the number of foreclosures and defaults is rising - particularly among homeowners with weak, or subprime, credit.

Three Democratic senators introduced a bill this month that would hold lenders more accountable and require them to determine the likelihood of a borrower to repay a loan. The bill is awaiting a hearing by the Senate banking committee.

Rep. Barney Frank, a Massachusetts Democrat who heads the House Financial Services Committee, is drafting a similar bill that focuses on abusive lending practices. He plans to introduce the legislation this summer.

But the proposals have met resistance from the mortgage industry and from some economists, who have argued that any clamping down on lending practices could cut off credit and hurt the economy. Bernanke seemed to express some sympathy for that view yesterday.

"I believe that in the long run, markets are better than regulators at allocating credit," he said.

The issue of how far to go in regulating lenders is a particularly tricky one, given the perilous state of the housing market, economists said.

"You don't want to go too far," said Michelle Meyer of Lehman Brothers. She said that overly ambitious regulations could have the unintended consequence of cutting off credit, hurting home sales and adding to the already high levels of unsold properties on the market. "You don't want to impose too strict of standards where people can't get loans."

"The vast majority of mortgages, including even subprime mortgages, continue to perform well," Bernanke said. "We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy."

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