Bernanke Says Fed Will Enact New Loan Rules This Year

By Craig Torres and Scott Lanman

Sept. 20 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke repeated a pledge to lawmakers that the central bank will issue new consumer-protection rules by yearend.

``We are looking closely at some mortgage lending practices,'' Bernanke said in remarks prepared for a House Financial Services Committee hearing today. ``We will use our rulemaking authority'' to ``propose additional consumer protections later this year.''

Bernanke is trying to pre-empt congressional criticism of the Fed for lax enforcement and foot-dragging on rules to protect consumers following a surge in foreclosures and delinquencies on subprime mortgages. Barney Frank, the Massachusetts Democrat who chairs the House panel, has warned the Fed to use or ``lose'' its regulatory powers.

The Fed chief said that the subprime turmoil has spread through financial markets, ``raising concern about the consequences for economic activity.'' He noted that the Federal Open Market Committee on Sept. 18 cut its benchmark interest rate by half a point to 4.75 percent.

Bernanke appears at the hearing with Treasury Secretary Henry Paulson and Alphonso Jackson, the secretary of housing and urban development, as lawmakers review efforts to keep people in their homes and curtail abusive lending practices. The Fed chief repeated language from the central bank's statement that policy makers are committed to safeguard the economy from recession.

`Act as Needed'

``Recent developments in financial markets have increased the uncertainty surrounding the economic outlook,'' Bernanke said, echoing the FOMC statement. ``The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable growth.''

Bernanke reiterated his opposition to letting Fannie Mae and Freddie Mac, the largest source of money for American home loans, purchase the so-called jumbo mortgages that exceed $417,000. Because investors falsely believe the companies have the full backing of the government, expanding the companies' role would reduce ``market discipline,'' he said.

If Congress does ease the limit, lawmakers should consider making the move ``both explicitly temporary and able to be implemented sufficiently promptly to serve its intended purpose,'' Bernanke said.

Fannie, Freddie Limits

Paulson said that he could accept temporarily letting Fannie Mae and Freddie Mac package jumbo mortgages into securities if Congress creates a tougher regulator for the firms.

Housing markets are now in the worst recession since 1991. Home building slowed to a 1.331 million annual rate in August, a 12-year low. Residential investment subtracted 0.6 percent from gross domestic product in the second quarter on an annual rate.

Bernanke said the market for subprime loans has ``adjusted sharply,'' with investors now demanding tougher lending standards and some lenders ending use of mortgage brokers, who aren't overseen by federal regulators. That makes a repeat of the subprime crisis unlikely, the chairman said.

``Markets do tend to self-correct,'' Bernanke said. ``The reassessment and resulting increase in the attention to loan quality should help prevent a recurrence of the recent subprime problems.''

Subprime-mortgage borrowers facing foreclosure may lose their homes at a rate above 50 percent, higher than the historical average, Bernanke said.

``That ratio may turn out to be higher in coming quarters because the proportion of subprime borrowers, who have weaker financial conditions than prime borrowers, is higher,'' the chairman said in the testimony. ``The rise could be tempered somewhat by loan workouts.''

The Fed and other banking regulators on Sept. 4 called on mortgage lenders to stave off foreclosures by cutting or postponing home payments for cash-strapped borrowers. The Bush administration on Aug. 31 also enlarged a home-loan insurance program to help reduce foreclosures.

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