Bernanke Says Subprime Lending Curbs Will `Restrain' Housing (Bloomberg)

By Craig Torres and Alison Vekshin

May 17 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the housing market is likely to remain restrained in coming quarters as tighter lending standards limit mortgage financing to subprime borrowers and foreclosures rise.

``Curbs on this lending are expected to be a source of some restraint on home purchases and residential investment in coming quarters,'' Bernanke said at the Chicago Fed Bank's annual conference on bank structure and competition. ``We are likely to see further increases in delinquencies and foreclosures this year and next as many adjustable-rate loans face interest-rate resets.''

The Fed chairman maintained his forecast that troubles in housing would not spillover into the economy. ``We do not expect significant spillovers from the subprime market to the rest of the economy or financial system,'' Bernanke said.

Lawmakers and consumer advocates have blamed the Fed and other regulators for lax enforcement during the record $2.8 trillion mortgage boom between 2004 and 2006. The Fed didn't publicly rebuke any bank for failing to follow up on guidance on lending practices in the period. Regulators could have ``done more sooner,'' Roger Cole, the Fed's chief bank supervisor told legislators in March.

The housing slump has constrained the Fed's interest-rate policy, keeping the benchmark lending rate on hold at 5.25 percent for seven consecutive meetings even as inflation has been at or above the top of a range preferred by at least a half-dozen policy makers. Bernanke didn't discuss monetary policy in his remarks. His forecast of a continuing rise in delinquencies and foreclosures suggests the Fed doesn't yet see stability in housing markets.

``Although a leveling-off of sales late last year suggested some stabilization of housing demand, the latest readings indicate a further stepdown in the first quarter,'' Bernanke said.

Subprime mortgages are extended at rates at least 2 or 3 percentage points above prime loans. Borrowers typically have poor or limited credit histories or high debt relative to income. About 14 percent of all first-lien mortgages were subprime loans last year, Bernanke said.