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Fed's Bies Says Most Of Mortgage Market Is Problem Free

Federal Reserve Board Governor Susan Bies on Tuesday said the bulk of the U.S. mortgage market was without bad debt problems, which are concentrated in the subprime, low-income sector.

"We have seen coming out of this very rosy period one segment of this market that is starting to behave in a very problematic way and that is the subprime adjustable rate mortgages," she said in a speech to the Duke University Fuqua School of Business.

"In the aggregate, what I'm talking about is a sliver that is 7% to 8% of all outstanding mortgages," she said.

Mounting debt delinquency and foreclosures in the subprime market as the U.S. housing market cools has been a source of concern for policy-makers.

But Bies' remarks played down the risk that this was having a broader impact on home-owners, which could have serious implications for spending and growth.

The U.S. central bank says the economy will expand at a moderate pace this year while inflation comes down, based on its assessment that the chill from the housing market will not
spread, and the overhang of unsold homes will be worked off in time.

Residential investment and the auto sector have been the weak spots in an otherwise robust U.S. economy.

But Bies stressed that there still was a high potential for a correction to occur in the housing market, making it hard for the Fed to assess conditions.

"There's a lot of vacant housing out there right now," Bies said during a question and answer session after her speech. "The potential for inventory correction is still very high."

On the other hand, while supply is hard to judge, a downturn in demand for housing may be nearly over.

"We may be near the floor in terms of demand," Bies said.