Fed Chairman Offers Congress Assurances On Mortgage Crisis
Thursday, September 20th 2007, 8:38 am
By: News On 6
WASHINGTON (AP) _ Federal Reserve Chairman Ben Bernanke told Congress Thursday that the credit crisis has created ``significant market stress'' and offered fresh assurances that regulators would take steps to curb fallout related to the mortgage mess.
Bernanke made the statement in testimony prepared for a hearing Thursday before the House Financial Services Committee. It came just two days after the Federal Reserve sliced a key interest rate by a bold half-percentage point to prevent the weight of housing and credit problems to sink the economy. It was the first time in more than four years the Fed cut this rate.
``Global financial losses have far exceeded even the most pessimistic estimates of the credit losses on these loans,'' the Fed chairman said.
The meltdown in the housing and mortgage markets has shaken Wall Street and Main Street.
Bernanke promised lawmakers that the Fed will take steps to crack down on abusive or bad lending practices.
``The Federal Reserve takes responsible lending and consumer protection very seriously. Along with other federal and state agencies, we are responding to the subprime problems on a number of fronts,'' he said. ``We are committed to preventing problems from recurring, while still preserving responsible subprime lending.''
Treasury Secretary Henry Paulson, also scheduled to appear at the hearing, signaled that the administration would consider allowing the big mortgage companies Fannie Mae and Freddie Mac to temporarily buy, bundle and sell as securities any loans exceeding $417,000.
The idea, which represents a policy change for the administration, is portrayed as a way to inject liquidity into the stretched mortgage market.
Paulson said the change involving jumbo loans could occur only in tandem with tighter oversight of the two government-sponsored mortgage companies, according to a person familiar with the remarks the secretary prepared for the hearing.
Foreclosures are at record highs and late payments are spiking. Lenders have been forced out of business and investors have taken huge financial hits. Lax lending standards during the housing boom came to roost after the housing bust.
Lawmakers in Congress and administration officials have been scrambling to curb the fallout. The carnage has been the worst, with ``subprime'' mortgages held by borrowers with spotty credit or low incomes. Many are at risk of losing their homes.
Analysts estimate that at least 2 million adjustable-rate mortgages will jump from very low initial teaser rates to higher rates this year and next. Steep prepayment penalties have made it difficult for some to get out of their mortgages. Some overstretched homeowners can't afford to refinance or even sell their homes.
To help struggling homeowners, proposals in Congress would expand federal backing of mortgages. The House on Tuesday passed legislation that would give more leeway to the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers. The Senate has its own bill. The administration, meanwhile, is working with the FHA to help squeezed homeowners.
There's been a big debate in Washington about ways mortgage giants Fannie Mae and Freddie Mac could help out. The government on Wednesday nudged up their investment caps, a move aimed at alleviating stress in the mortgage market.