Bad Credit Florida Mortgage Problems Not So Serious, Bernanke Says

Federal Reserve Chairman Ben Bernanke said last week that the financial system can withstand the fallout from the bad credit Florida mortgage market “without serious problems.”
“We have spent a bit of time evaluating the financial implications of the subprime issues, tried to assess the magnitude of losses, and tried to determine how concentrated they are,” Bernanke said. “There is a sense that, although there is always a possibility for some kind of disruption …, the financial system will absorb the losses from the subprime mortgage problems without serious problems.”

During his speech to a Chicago Fed gathering, which focussed on the subprime market and the response of regulators, Mr. Bernanke said the effects of the problems in the subprime market on the broader housing market will likely be limited. He also said he doesn’t expect the subprime problems to have significant spillover to the rest of the economy.

“Curbs [on subprime lending] are expected to be a source of some restraint on home purchases and residential investment in coming quarters,” Mr. Bernanke said in his prepared remarks. “Moreover, we are likely to see further increases in delinquencies and foreclosures this year and next as many [adjustable-rate Florida home loans] face interest-rate resets.”

Asked by an audience member about whether the Fed is concerned about risks for banks amid the spate of large private-equity deals, Mr. Bernanke acknowledged there are “some significant risks associated with the financing of private equity.”

“We are looking at that. We do think it’s very important for banks to be quite aware of the risks associated with working with private-equity firms,” he said. “I urge banks to closely evaluate the risk that they’re taking not only in the context of a highly liquid, benign financial environment, but in one that might conceivably be less liquid and benign.”

Facing criticism from members of Congress about lax regulation, Bernanke also promised that the Fed would do everything possible to crack down on abuses that have put millions of homeowners in jeopardy of defaulting on their Florida mortgages.

“We at the Federal Reserve will do all that we can to prevent fraud and abusive lending and to ensure that lenders employ sound underwriting practices and make effective disclosures to consumers,” Bernanke said.

However, his remarks did not detail any specific tightening of regulations, saying only that the Fed would hold hearings in coming weeks on the matter.