Fed's Kroszner: Mortgage Market to Recover Slowly

The US mortgage market will recover slowly from a wave of bad loans that threw financial markets into crisis and the lending system will need repairs, Federal Reserve Governor Randall Kroszner said Thursday.

Randall S. Kroszner

"Recovery in the mortgage market will take time and will require more market and regulatory discipline," Kroszner said in remarks to the Conference of State Bank Supervisors.

The meltdown of the U.S. housing market and ensuing credit crunch have brought the economy to the brink of recession.

Widespread delinquencies on adjustable-rate loans made to borrowers with dubious credit played a major part in the debacle.

The Federal Reserve has slashed benchmark interest rates by 3.25 percentage points since September to 2 percent in a bid to buffer the cooling economy. In addition, the Fed has pumped hundreds of billions of dollars into financial markets to restore normal functioning in credit markets frozen by the crisis.

The Fed and other bank regulators have come under fire for failing to halt sloppy lending practices and weak protections against risks. Some reform proposals would remove the Fed from day-to-day supervision of financial institutions but instead give the central bank umbrella responsibility for ensuring the stability of the financial system.

Kroszner told the conference that the Fed benefits from day-to-day scrutiny of bank operations.

"The supervision and regulation function that we have at the Fed has been very important providing us with the information and expertise to be able to understand financial market developments and then respond quickly both in individual situations and to market developments," he said.

Kroszner said more information about loans and packages of loans that are sold to investors will reduce some of the risks of lending in the future. Investors will need to insist on clearer information about the characteristics of loans and borrowers from lenders in order to make better judgments about risk, he said.

Financial institutions will also have to have stronger protections in place in case some loans go sour, he added.

Regulators will need to improve ways to be certain financial institutions are protected against risks, he said.

Kroszner said he expects the "originate-to-distribute model" of lending -- in which a loan is made, then packaged into a security and sold to investors -- to continue to be an important part of the financial landscape.