Bernanke: Subprime Mortgage Woes Won't Seriously Hurt Economy

Federal Reserve Chairman Ben Bernanke said Thursday that he didn't believe the growing number of mortgage defaults would seriously harm the economy, and also noted that banks  share significant risks when financing private equity deals.

Facing criticism from members of Congress about lax regulation, Bernanke also promised that the Fed would do everything possible to crack down on abuses that have put millions of homeowners in jeopardy of defaulting on their mortgages.

"We at the Federal Reserve will do all that we can to prevent fraud and abusive lending and to ensure that lenders employ sound underwriting practices and make effective disclosures to consumers," Bernanke said in remarks prepared for a financial conference in Chicago.

However, Bernanke in his remarks did not detail any specific tightening of regulations, saying only that the Fed would hold hearings in coming weeks on the matter.

Bernanke said while it was likely that there would be further increases in mortgage delinquencies and foreclosures this year and in 2008, he did not believe this problem would be enough to derail the overall economy.

"We believe the effect of the troubles in the subprime sector on the broader housing market will be limited and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system," Bernanke said in his remarks, copies of which were distributed in Washington.

Bernanke's comments to a banking conference sponsored by the Federal Reserve Bank of Chicago marked his most extensive review of the troubles in the subprime market since the Fed and other banking regulators came under criticism from members of Congress.

Meanwhile, when the Fed governor was asked whether he saw banks taking on too much risk by financing private equity deals, he said: "There are some significant risks associated with the financing of private equity including bridge loans. ... We are looking at that."

Banks Loosened Standards 

Senate Banking Committee Chairman Christopher Dodd said a "chronology of regulatory neglect" allowed the problems in the subprime market to go unchecked.

Banks and other lenders loosened their standards for making riskier mortgages during the five-year housing boom.

The problems in subprime mortgages - higher-priced home loans for people with weaker credit histories - have roiled financial markets in recent months and raised concerns about possible spillover effects to the larger economy.

But in his speech, Bernanke said that the "vast majority of mortgages, including even subprime mortgages, continue to perform well."

He said that past gains in home prices have left most homeowners with significant amounts of equity in their houses and the growth in jobs and incomes should allow most households to keep their financial obligations in a manageable range.