Bernanke: Tighter Mortgage Lending Will Restrain Housing Market
Federal Reserve Chairman Ben S. Bernanke said “tighter” lending standards for home mortgages will “restrain” housing demand for longer than policy makers anticipated.
The Fed chairman said the housing slump hasn’t spilled over into other parts of the economy and he maintained a forecast for “moderate” growth. Government and industry reports this month showed acceleration in job growth, manufacturing and personal spending and gains in services industries.
“The slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected,” Bernanke said in remarks via satellite to a conference in Cape Town, South Africa. As bad credit mortgage lenders make it tougher to get loans, that will “restrain housing demand, although the magnitude of these effects is difficult to quantify.
Fed officials have repeatedly cited housing as a threat to their forecast for faster growth this year. At the same time, they continue to view inflation as the biggest risk, keeping interest rates unchanged since last raising them a year ago. Economists and investors abandoned forecasts for a cut as signs of strength emerged in other parts of the economy.
“We have also seen a gradual ebbing of core inflation, although its level remains somewhat elevated,” Bernanke said to the International Monetary Conference. “Although core inflation seems likely to moderate gradually over time, the risks to this forecast remain to the upside.”
Minutes of the May 9 Fed meeting released last week noted that the housing market recession would continue longer than officials had anticipated. By contrast, Fed officials in January cited “tentative signs of stabilization” in home sales.
Home building has fallen for six consecutive quarters, the worst slump since 1991. Residential investment also lopped almost a percentage point off of economic growth in the first quarter. Building permits in April fell to the lowest level in almost a decade, the Commerce Department reported last month.
As defaults and mortgage delinquencies increased, lenders made it tougher to receive mortgage loans.
Lending Standards
In March, Countrywide Financial Corp., the biggest U.S. mortgage provider, stopped taking applications for no-money-down loans from risky borrowers without proof of income. General Electric Co.’s WMC Mortgage said it would refuse mortgages to borrowers with credit scores below 600. Wells Fargo & Co., the largest U.S. subprime lender, said it changed standards effective Feb. 16 for some risky customers.
The Fed’s Open Market Committee is still likely to keep its target rate for overnight loans between banks at 5.25 percent when it next meets June 27-28, according to the median forecast of economists surveyed by Bloomberg News.
Goldman Sachs Group Inc. Chief U.S. Economist Jan Hatzius today ditched his call for rate cuts this year, joining his counterpart David Rosenberg of Merrill Lynch & Co. yesterday.
Bernanke said in his speech he’s open to imposing tougher regulation of home loan lenders to prohibit “unfair” practices.
The Fed, which has authority to write rules for all lenders, is under pressure from Congress to further restrict predatory lending and toughen up standards. The Fed’s Board of Governors in Washington will hold a public hearing on mortgage rules next week.