Congress told Fed will act against bad lending practices
(WASHINGTON) Federal Reserve chairman Ben Bernanke told Congress yesterday that the credit crisis has created 'significant market stress' and offered fresh assurances that regulators would take steps to curb fallout related to the mortgage mess.Mr Bernanke made the statement in testimony before the House Financial Services Committee. He spoke at the hearing with Treasury Secretary Henry Paulson and Alphonso Jackson, Secretary of Housing and Urban Development, as lawmakers review efforts to keep people in their homes and curtail abusive lending practices. The Fed chief repeated language from the central bank's statement that policy makers are committed to safeguard the economy from recession.
The hearing came just two days after the Federal Reserve sliced a key interest rate by a bold half-percentage point to prevent the weight of housing and credit problems from sinking the economy. It was the first time in more than four years that the Fed has cut this rate.
'Global financial losses have far exceeded even the most pessimistic estimates of the credit losses on these loans,' the Fed chairman said. The situation, he acknowledged, 'has created significant market stress'. The meltdown in the housing and mortgage markets has shaken Wall Street and small investors alike.
Mr Bernanke promised lawmakers that the Fed will take steps to crack down on abusive or bad lending practices.
'The Federal Reserve takes responsible lending and consumer protection very seriously. Along with other federal and state agencies, we are responding to the sub-prime problems on a number of fronts,' he said. 'We are committed to preventing problems from recurring, while still preserving responsible sub-prime lending.' The Fed has already taken a number of steps and other proposals are being considered.
In his prepared testimony, Mr Bernanke did not offer new clues about the Fed's next move on interest rates.
The Fed chief, repeating the rationale offered on Tuesday for cutting rates, acknowledged that the financial turmoil stemming from the troubled housing and credit markets have 'increased the uncertainty to the outlook'. That was the same language he and his Fed colleagues used on Tuesday.
Some economists believe the Fed will probably reduce rates again at its next meeting in late October.
Housing markets are now in the worst recession since 1991. Home building slowed to a 1.331 million annual rate in August, a 12-year low. Residential investment subtracted 0.6 per cent from gross domestic product in the second quarter on an annual rate.
Foreclosures are at record highs and late payments are spiking.
Mr Bernanke said that the market for sub-prime loans has 'adjusted sharply', with investors now demanding tougher lending standards and some lenders ending use of mortgage brokers, who are not overseen by federal regulators. That makes a repeat of the sub-prime crisis unlikely, the chairman said.
'Markets do tend to self-correct,' Mr Bernanke said. 'The reassessment and resulting increase in the attention to loan quality should help prevent a recurrence of the recent sub-prime problems.'
Sub-prime-mortgage borrowers facing foreclosure may lose their homes at a rate above 50 per cent, higher than the historical average, Mr Bernanke said.
'That ratio may turn out to be higher in coming quarters because the proportion of sub-prime borrowers, who have weaker financial conditions than prime borrowers, is higher,' the chairman said. -- AP, Bloomberg
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