Federal Reserve Official Says Mortgage Market Mostly Problem-Free

A Federal Reserve Board Governor said Tuesday said the bulk of the U.S. mortgage market was without bad debt problems, which are concentrated in the lower-income, subprime [or bad credit mortgage] sector.

“We have seen coming out of this rosy period one segment of this market that is starting to behave in a very problematic way and that is the subprime, adjustable rate mortgages,” she said in a speech to the Duke University Fuqua School of Business.

“In the aggregate, what I’m talking about is a sliver that is 7-8 percent of all outstanding adjustable-rate mortgages,” she said.

Mounting delinquency woes and foreclosure risk in the bad credit home loan market as the U.S. real estate climate cools has been a source of concern for policy-makers.

But Bies’ remarks played down the element of risk that this was having a broader impact on homeowners, which could have serious implications for consumer spending and growth.

The U.S. central bank says the economy will expand at a moderate pace this year while inflation comes down, based on its assessment that the lasting chill from the housing market will not spread, and the inventory of unsold homes will be worked off in time.

Residential investment and the auto sector have been the weak spots in an otherwise robust U.S. economy. But Bies stressed that there still was a high potential for a correction to occur in the housing market, making it hard for the Fed to assess conditions.

“There’s a lot of vacant housing out there right now,” Bies said during a question and answer session after her speech. “The potential for inventory correction is still very high.”

On the other hand, while supply is hard to judge, a downturn in demand for mortgage loans may be nearly over, signaling brighter days ahead for real estate sales.

“We may be near the floor in terms of demand,” Bies said.

SOURCE: Reuters