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US mortgage crisis will be extended, Fed chief says

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More US homeowners are likely to default on risky loans over the coming months, extending uncertainty about US economic growth, Federal Reserve head Ben Bernanke said Friday.

The US central bank “stands ready to take additional actions as needed” to fight turmoil in financial markets caused by the meltdown of much of the US subprime mortgage market, the Fed chief said. “Global financial losses have far exceeded even the most pessimistic projections of credit losses on those loans,” he said in a speech in Wyoming. In a strong indication of government worry over the roiling US mortgage crisis, US President George W. Bush was preparing later Friday to propose a federal aid program for high-risk borrowers and low-income homeowners. Bernanke made plain there would be no Fed bailout for failing lenders or investors stuck with losses, saying that “is not the responsibility of the Federal Reserve.” He gave no sign of whether the Fed might cut its benchmark interest rate to help boost the US economy. “Inevitably, the uncertainty surrounding the outlook will be greater than normal,” he said at an economic conference.

US stock market investors expect a rate cut to come at the Fed’s meeting Sept. 18. The federal funds rate has stood at 5.25% for more than a year. Futures markets are pricing in multiple rate cuts by the end of the year. “The further tightening of credit conditions, if sustained, would increase the risk that the current weakness in housing could be deeper or more prolonged than previously expected, with possible adverse effects on consumer spending and the economy more generally,” Bernanke said.
Bernanke said the Fed is monitoring developments in housing and the economy “closely.” The housing downturn “has been sharp,” Bernanke said, and “further declines in homebuilding are likely.” Delinquencies among subprime borrowers with adjustable-rate mortgages are likely to rise when those borrowers face interest-rate resets in coming quarters.

Lenders have pushed subprime loans to the least creditworthy borrowers, helping many Americans buy homes and driving up home prices in the last few years. A sharp slowdown in US homebuilding, a drop in home values and rising interest rates have forced many of those homeowners to default on their mortgages, squeezing the financial companies that made the loans and leading to a broader, global credit crunch. Bernanke warned that the crisis was far from over. (c&m.com)

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