Bernanke says homeowners to be protected

Federal Reserve Chairman Ben S. Bernanke offered fresh assurances yesterday that regulators are taking steps to better protect would-be homeowners from abusive mortgage practices.

Mr. Bernanke appeared before the Senate Banking, Housing and Urban Affairs Committee during his second straight day on Capitol Hill, where he delivered the Fed’s midyear economic assessment.

On the housing front, there have been growing problems for borrowers with spotty credit histories who hold higher-risk subprime mortgages. That has rattled investors and irked some lawmakers, who have criticized the Fed and other regulators for lax oversight.

Late payments and foreclosures are besetting homeowners with these subprime mortgages, especially those with adjustable rates. Mr. Bernanke acknowledged those problems are “likely to get worse before they get better.”

The subprime meltdown has forced more than 30 lenders, including New Century Financial Corp., into bankruptcy.

“A lot of the subprime mortgage paper is not, you know, as good as was thought originally,” he told the panel. He predicted “significant financial losses” associated with delinquencies on those mortgages. Some estimates are that subprime-related credit losses could be anywhere from $50 billion to $100 billion.

The Fed, Mr. Bernanke said, is conducting a thorough review of potential actions to help consumers and would-be homeowners and prevent problems from recurring. He said the Fed is committed to providing more effective disclosures to help consumers defend against improper lending. The Fed also is considering new rules in several areas, including restrictions on loans that don’t require proof of a borrower’s income and limitations on financial penalties for borrowers who make early payments.

The banking committee’s chairman, Sen. Christopher J. Dodd, Connecticut Democrat, welcomed the steps.

“I trust and expect that it will result in significant action by the Fed to ensure that every American who seeks to buy a home will receive fair, reasonable and responsible treatment by his or her lender,” he said.

Even with these efforts, some senators believe Congress probably needs to step in.

“I don’t think consumers will truly be safe from irresponsible and deceptive lending practices until we enact tougher federal laws to prevent this subprime mess from happening again,” said Sen. Charles E. Schumer, New York Democrat.

Other lawmakers want to see the Fed act quickly.

“More than a million Americans lost their homes last year,” said Sen. Robert Menendez, New Jersey Democrat. “In fact, I would dare to argue that another storm is on its way as adjustable rate mortgages explode in coming months and force more homeowners into foreclosure.

“And so, in my mind, this is not just simply a time for suggestions, it is a time for solutions,” he said.

Mr. Bernanke defended the Fed’s pace, saying it is moving as fast as it “responsibly” can on the subprime matter.

Sen. Richard C. Shelby, Alabama Republican, said he is worried that problems in the subprime mortgage market will spread.

Mr. Bernanke stated anew yesterday that subprime problems probably would not seriously spill over to the broader economy or the financial system. Still, he added, “That is something we are very alert to.”

Rising interest rates and weak home values terribly squeezed some homeowners, especially those with subprime mortgages, making it difficult for them to keep up with their mortgage payments. Lax lending standards and, in some cases, abusive lending practices and outright fraud have contributed to the problems, Mr. Bernanke said.

Moreover, some borrowers took out mortgages without fully understanding the terms, adding to the turmoil, the Fed chief explained.

In his midyear economic assessment, he repeated the Fed’s belief that the economy will grow gradually this year, restrained by the housing slump. Even so, the threat that inflation won’t recede as anticipated remains the Fed’s biggest worry.

Anguish over inflation held sway at the June 27 meeting of monetary policy-makers — as it has at previous sessions — according to minutes released yesterday of the deliberations June 27-28. This record shows that their “predominate concern” continued to be whether inflation would fail to recede as anticipated.

The Conference Board released a report yesterday suggesting economic growth is likely to slow in the coming months as the sour housing market takes a deeper toll on businesses and consumers.

The board’s index of leading indicators fell 0.3 percent in June, compared with a 0.2 percent increase in the prior month.