Facing criticism from members of Congress about lax regulation, Bernanke said Thursday that the Fed was reviewing all of its options from bolstering disclosure requirements on what lenders must tell prospective borrowers to writing tougher rules to guard against fraud.
"We at the Federal Reserve will do all that we can to prevent fraud and abusive lending and to ensure that lenders employ sound underwriting practices and make effective disclosures to consumers," Bernanke said in a speech to a banking conference in Chicago.
Bernanke, who served as President Bush's chief economic adviser before taking over the Fed post in February 2006, said regulators needed to be sure that any rules they imposed did not stifle the market for legitimate loans.
"In deciding what actions to take, regulators must walk a fine line," he said. "We must do what we can to prevent abuses or bad practices, but at the same time we do not want to curtail responsible subprime lending or close off refinancing options that would be beneficial to borrowers."
He said that while it was likely there would be further increases in mortgage delinquencies and foreclosures this year and in 2008, he did not believe these problems would be enough to derail the overall economy.
"We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system," Bernanke said. He said in answer to a question that he believed the financial system would be able to absorb the losses from the subprime mortgage loans that go bad without major difficulties.
Bernanke's comments represented his most extensive review of the troubles in the subprime market since the Fed and other banking regulators came under criticism from members of Congress earlier this year. The lawmakers said the regulators were not doing enough to halt abusive practices in the subprime market, which provides loans to people with weak credit histories.
Problems with subprime loans have roiled financial markets and raised concerns about possible spillover effects to the entire economy. One major worry was a potentially more severe downturn in housing if significant numbers of homes get dumped back on the market because borrowers cannot meet payments adjustable mortgage payments that are resetting at higher levels. Senate Banking Committee Chairman Christopher Dodd, D-Conn., who earlier called the whole episode a "chronology of regulatory neglect," welcomed Bernanke's announcement of Fed hearings. "It's past time for action," Dodd said in a statement, which urged the central bank to "move expeditiously" to promulgate tougher rules. Sen. Charles Schumer, D-N.Y., who has introduced legislation to help homeowners avoid foreclosures, said Congress needed to act in time to deal with thousands of homeowners facing the threat of foreclosure. "I hope Chairman Bernanke is right when he says that a slumping housing market will not affect the broader economy, but I would not bet the house on it," Schumer said in a statement. Dodd, Schumer and other Democrats on the Senate Banking Committee wrote Bernanke a letter last month encouraging the Fed to write new rules against predatory lending in the subprime market. They urged the central bank to require all lenders to assess a borrower's ability to repay before making a home loan, classify as unfair and deceptive any failure by lenders to earmark money for payment of taxes and insurance and restrict the use of home loans with only minimal documentation required of borrowers. Home-mortgage delinquencies and foreclosures have been surging in recent months, especially among borrowers who took out subprime mortgages. In his speech, Bernanke said that there are currently about 7.5 million subprime first mortgages, accounting for about 14 percent of all first mortgages on homes. He said the "vast majority of mortgages, including even subprime mortgages, continue to perform well."