- The Washington Times - Thursday, May 18, 2006

From combined dispatches

A wave of innovation in consumer credit markets has created a surge in credit for the average consumer, but that rapid growth also has brought an increase in “bad outcomes,” Federal Reserve Bank of Richmond President Jeffrey Lacker said yesterday.

“The expansion of retail credit has brought an increase in what one might call ‘bad outcomes’ — households that face high debt burdens, have trouble meeting payment commitments, and perhaps even default and resort to bankruptcy,” he said during a speech in Norfolk.

But he said a move toward lending restrictions or the prohibition of some lending practices would be a “dangerous approach.”

Mr. Lacker said those proposals often are aimed at consumer protection, not prudent supervision.

“In the long run, it would tend to slow innovation and constrain the availability of financial products to a broad range of consumers in order to protect the relatively few who use a credit product inappropriately or unadvisedly,” he said.

Innovation has allowed banks to extend nontraditional mortgage products to new borrowers, including those with lower creditworthiness, he said.

But those changes bring more risk, he said, noting that innovation is an “inherently risky activity.”

“As supervisors, it is important for us to understand that innovation in financial products is likely to be a feature of the banking landscape for many years to come,” Mr. Lacker said.

Fed Chairman Ben Bernanke also addressed the issue of risky mortgage loans yesterday during a speech on banking in Chicago.

He pointed out that the Fed has issued some guidance for lenders and he underscored the importance of borrowers making sure they understand how interest-only and other nontraditional mortgages work.

“We’re not saying you shouldn’t make these loans. What we’re saying is that they [should] be done the right way,” he said.

Mr. Bernanke also said the housing market, after flying high for five years, has lost altitude and appears headed for a safe landing.

“It seems pretty clear now that the U.S. housing market is cooling,” he said in a question-and-answer session after the speech.

He noted that home sales are slowing, as is housing construction.

“Our assessment at this point … is that this looks to be a very orderly and moderate kind of cooling,” he said.

One of the things that the Fed chairman and his colleagues are watching is the extent to which a housing cool-down will slow overall economic activity.

The housing market has been a top economic performer. The sector has racked up record-high sales five years in a row. Rapid appreciation in house prices has made homeowners feel wealthy and has powered consumer spending, helping the economy move solidly ahead.

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