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Bernanke Says 'Tighter' Lending to 'Restrain' Housing
By Craig Torres


June 5 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said [b]"tighter'' lending standards for mortgages will "restrain'' housing demand [/b]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 subprime mortgage lenders make it tougher to get loans, that will "restrain housing demand, although the magnitude of these effects is difficult to quantify,'' he said.

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.''

Dollar Slips

The dollar extended declines after Bernanke's remarks. It fell to $1.3525 per euro and 121.23 yen at 1:06 p.m. in New York. The U.S. currency pared losses after the Institute for Supply Management said its index of services industries rose in May to the highest since April 2006.
Minutes of the May 9 Fed meeting released last week noted that the housing 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 get 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. Merrill Lynch & Co. Chief U.S. Economist David Rosenberg yesterday dumped his call for the Fed to lower borrowing costs this year.
Bernanke said in his speech he's open to imposing tougher regulation of 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.

Additional Measures

"Combating bad lending practices, including deliberate fraud or abuse, may require additional measures,'' he said today. Still, the Fed must "walk a fine line'' on regulation, Bernanke said, repeating remarks made in Chicago last month.

The Fed chief noted that he favors better disclosure and consumer education, and said regulators will continue to use supervisory guidance to remind lenders of standards.
"We have an obligation to prevent fraud and abusive lending,'' he said. "We must tread carefully so as not to suppress responsible lending or eliminate refinancing opportunities for subprime borrowers.''

Economists say Fed policies contributed to the housing boom and bust. Former Chairman Alan Greenspan, Bernanke -- at the time a Fed governor -- and others were concerned in 2003 that deflation could hit the U.S., as it did Japan for a seven-year period. They cut the key rate to 1 percent and held it there for a year.

Measured Pace

When they did raise rates, from June 2004, the Fed committed to a "measured'' pace of a quarter percentage point per meeting. That helped "hold down long-term interest rates,'' said Brian Sack, who as a Fed staff economist in 2004 helped Bernanke research the effect of communication on interest rates. Sack is now a vice president at Macroeconomic Advisers LLC in Washington.

As borrowing costs stayed low even as economic growth accelerated, home-buyers took on a record amount of mortgage debt. From 2004 to 2006, lenders wrote a $2.8 trillion in new home loans, unprecedented for any three-year period.

"The Fed was too easy for too long,'' said Ethan Harris, chief U.S. economist at Lehman Brothers and former New York Fed staff economist. The Fed's gradual pace of lifting rates "contributed to the lack of bite from monetary policy.''

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net .
Last Updated: June 5, 2007 13:10 EDT