Federal Reserve Chairman Ben S. Bernanke said the collapse of U.S. lending will probably cause “long-lasting” damage to home prices, household wealth and borrowers’ credit scores.
“One would be forgiven for concluding that the assumed benefits of financial innovation are not all they were cracked up to be,” the Fed chairman said today in a speech at the central bank’s community affairs conference in Washington. “The damage from this turn in the credit cycle — in terms of lost wealth, lost homes, and blemished credit histories — is likely to be long-lasting.”
The U.S. central bank has cut the benchmark lending rate to as low as zero and taken unprecedented steps to stem the credit crisis through direct support of consumer finance and mortgage lending. The Fed plans to purchase as much as $1.25 trillion in agency mortgage-backed securities this year to support the housing market and is providing financing for securities backed by loans to consumers and small businesses.
Bernanke and the Federal Reserve Board approved rules last July to toughen restrictions on mortgages, banning high-cost loans to borrowers with no verified income or assets and curbing penalties for repaying a loan early. The action came after members of Congress and other regulators urged the Fed to use its authority to prevent abusive lending.
“We should not attempt to impose restrictions on credit providers so onerous that they prevent the development of new products and services in the future,” Bernanke said. Regulations should ensure “innovations are sufficiently transparent and understandable to allow consumer choice to drive good market outcomes.”
Outlook for Economy
Bernanke didn’t discuss the outlook for the economy. Central bankers next meet April 28-29. At their March meeting, policy makers said they saw “downside risks as predominating in the near term,” according to minutes released April 8.
Lenders, including non-bank financial companies, expanded mortgage and other lending this decade to borrowers with blemished or scant credit histories. Subprime mortgage originations rose to $600 billion in 2006, an increase from $160 billion in 2001, according to newsletter Inside Mortgage Finance.
Bernanke said the packaging and sale of mortgages into securities “appears to have been one source of the decline in underwriting standards” because originators have less stake in the risk of a loan.
Subprime mortgage delinquencies stood at 22 percent in the fourth quarter compared to 5 percent for loans to the highest- rated or “prime” borrowers, according to the Mortgage Bankers Association.
“Something went wrong,” Bernanke said. “We have come almost full circle with credit availability increasingly restricted for low- and moderate-income borrowers.”
The recession that began in December 2007 has come at a high cost to American employment and wealth.
Unemployment rose to 8.5 percent in March, the highest since 1983. U.S. home prices fell 8.2 percent in 2008, according to the Federal Housing Finance Agency. Household net worth fell $11.2 trillion in 2008, according to Fed data.
U.S. homeownership rates fell to 67.5 percent in the fourth quarter of 2008 from 68.9 percent in the same quarter of 2006, according to U.S. Census Bureau data. Black homeownership rates have fallen to 46.8 percent from 48.2 percent in the same period, and Hispanic homeownership stood at 48.6 versus 49.5 percent.
Mortgage delinquencies in the fourth quarter increased to a seasonally adjusted 7.88 percent of all loans, the highest in records going back to 1972, according to the Mortgage Bankers Association. Loans in foreclosure rose to 3.30 percent, also an all-time high. Bloomberg