U.S. News

Bernanke to Senate: Fed Acting on Abusive Loan Practices


Federal Reserve Chairman Ben Bernanke offered lawmakers fresh assurances on Thursday that regulators are taking steps to better protect would-be homeowners from abusive mortgage practices.

Bernanke appeared before the Senate Banking Committee in his second straight day on Capitol Hill, where he delivered the Fed's midyear economic assessment.

On the housing front, there have been growing problems for borrowers with spotty credit histories who hold higher-risk subprime mortgages. That has rattled investors and irked some lawmakers, who criticize the Fed and other regulators for lax oversight.

Ben Bernanke, President Bush's top economic adviser, speaks in the Oval Office at the White House after Bush named him to take over the Federal Reserve from retiring Alan Greenspan, in Washington, Monday, Oct. 24, 2005. It was the third time in as many years the president has turned to the 51-year-old Bernanke for a sensitive post. Bush named him to the Fed board in 2002, then made him chairman of the president's Council of Economic Advisers earlier this year. (AP Photo/J. Scott Applewhite)
J. Scott Applewhite

Late payments and foreclosures are spiking for homeowners with these subprime mortgages, especially those with adjustable rates. Bernanke acknowledged those problems are "likely to get worse before they get better."

The subprime meltdown has forced more than 30 lenders, including New Century Financial , into bankruptcy.

"A lot of the subprime mortgage paper is not, you know, as good as was thought originally," Bernanke told the panel. He predicted "significant financial losses" associated with delinquencies on these mortgages. Some estimates are that subprime-related credit losses could be anywhere from $50 billion to $100 billion, he said.

The Fed, Bernanke said, is conducting a thorough review of possible actions to help consumers and would-be homeowners and prevent problems from recurring. He said the Fed is committed to providing more effective disclosures to help consumers defend against improper lending. The Fed also is looking at new rules in several areas, including restrictions on loans that don't require proof of a borrower's income and limitations on financial penalties for borrowers who make early payments.

The committee's chairman Senator Chris Dodd, D-Connecticut, welcomed these steps.

"I trust and expect that it will result in significant action by the Fed to ensure that every American who seeks to buy a home will receive fair, reasonable and responsible treatment by his or her lender," Dodd said.

Even with these efforts, some senators believe Congress probably needs to step in.

"I don't think consumers will truly be safe until we enact tougher laws to prevent the subprime mess from happening again," said Senator Charles Schumer, D-New York.

Other lawmakers, meanwhile, want to see the Fed act more quickly.

Bernanke defended the Fed's pace, saying it is moving as fast as it "responsibly" can on the subprime matter.

Senator Richard Shelby, R-Alabama, said he is worried that problems in the subprime mortgage market won't stay contained and will spread. Bernanke has previously said he doubted that subprime problems would seriously spill over to the broader economy or the financial system.

In his midyear economic assessment, Bernanke repeated the Fed's belief that the economy will grow gradually this year, restrained by the housing slump. Even so, the threat that inflation won't recede as anticipated remains the Fed's biggest worry.

The Conference Board released a report Thursday suggesting economic growth is likely to slow in the coming months as the sour housing market takes a deeper toll on businesses and consumers.

The board's index of leading economic indicators fell 0.3% in June, compared with a 0.2% increase in the prior month.