Recent cuts in the US central bank rates were due to the larger than expected losses in the subprime mortgages market. Homeowners in the US receiving foreclosure notices (above) has also hit a record high this spring. -- PHOTO: APWASHINGTON - FED chairman Ben Bernanke said on Thursday the US central bank cut rates and added liquidity to the financial system amid 'significant market stress' and unexpectedly large losses in the housing sector.
Mr Bernanke said the economy and markets reacted to losses in the area of subprime mortgages that 'have far exceeded even the most pessimistic estimates'.
Appearing in the House of Representatives's Committee on Financial Services, Mr Bernanke said the worst of the mortgage maelstrom is not yet over, as more homeowners face difficulties making payments on adjustable rate mortgages (ARMs) that are being reset with higher interest rates.
'With house prices still soft and many borrowers of recent-vintage subprime ARMs still facing their first interest-rate resets, delinquencies and foreclosure initiations in this class of mortgages are likely to rise further,' he said.
Mr Bernanke said about 15 per cent of ARMs to subprime lenders with weak credit were in delinquency or foreclosure in July, and that about 320,000 foreclosures were initiated in each of the first two quarters of the year, up from a previous average of 225,000.
'It is difficult to be precise about the number of foreclosure initiations,' he said.
Mr Bernanke spoke two days after the Fed cut its base federal funds rate by half a point to 4.75 per cent 'to help forestall some of the adverse effects on the broader economy that might arise from the disruptions in financial markets'.
The Fed also cut its discount rate for direct loans from the central bank by 50 basis points, after reducing that rate by the same amount in Aug in an effort to ease access to credit for lenders amid tighter conditions.
Mr Bernanke said that the wide losses prompted a retrenchment by lenders, affecting the broader financial system.
'In this episode, the shift in risk attitudes combined with greater credit risk and uncertainty about how to value those risks has created significant market stress,' he said.
'On the positive side of the ledger, past efforts to strengthen capital positions and financial market infrastructure places the global financial system in a relatively strong position to work through this process.'
He added however that the Fed remains concerned about inflation despite its move.
'We will continue to pay very close attention to the inflation rate. I agree with you that an economy cannot grow in a healthy, stable way when inflation is out of control, and we will certainly make sure that that doesn't happen.' -- AFP
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