Near-term prospects for the housing market –the principal source of the
slowdown in economic growth over the past year – remain uncertain, but the
impact of subprime lending troubles has not rippled into other sectors, Federal
Reserve Chairman Ben Bernanke told the U.S. Congress Joint Economic Committee on
“Even if demand for housing falls no further, weakness in residential
construction is likely to remain a drag on economic growth for a time as
homebuilders try to reduce their inventories of unsold homes,” Bernanke
Developments in subprime mortgage markets “raise additional questions about
the housing sector. Delinquency rates on variable-interest-rate loans to
subprime borrowers, which account for a bit less than 10% of all mortgages
outstanding, have climbed sharply in recent months,” the chairman noted.
A large increase in early defaults on recently originated subprime
variable-rate mortgages “casts serious doubt on the adequacy of the underwriting
standards for these products,” Bernanke said.
The implications of these developments for the housing market as a whole, he
said, are less than clear. “The tightening of lending standards, although an
appropriate market response, will reduce somewhat the effective demand for
housing, and foreclosed properties will add to the inventories of unsold
Bernanke told Congress that the impact on the broader economy and financial
markets of the problems in the subprime market “seems likely to be contained,”
adding that mortgages to prime borrowers and fixed-rate mortgages to all classes
of borrowers continue to perform well, with low rates of delinquency.
The Fed will keep monitoring the situation closely, he said.
Source: Credit and Collections World