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US market to remain in the doldrums - 24 May 2007

The sub-prime lending crisis crippling homeowners across the US will hurt the housing market for at least the next 18 months as foreclosures continue to increase, warned US Federal Reserve chairman Ben Bernanke.

However, he also forecast that the problem would not spread to other areas of the economy – or the financial system as a whole. Speaking in Chicago, Bernanke said the tightening in sub-prime mortgage standards "are expected to be a source of some restraint on home purchases and residential investment in coming quarters".

"We are likely to see further increases in delinquencies and foreclosures this year and next as many adjustable-rate loans face interest-rate resets," he added. "We do not expect significant spillovers from the sub-prime market to the rest of the economy."

Politicians and consumer groups have blamed the Federal Reserve for the current crisis in which thousands of people have lost their homes and dozens of lenders collapsed into bankruptcy. They claim lax enforcement of regulation during the record $2.8 trillion (£1.4 trillion) mortgage boom between 2004 and 2006 meant the crisis was waiting to happen.

Mr Bernanke blamed the lenders. "As the underlying pace of mortgage originations began to slow, but with investor demand for securities with high yields still strong, some lenders evidently loosened underwriting standards."

The practice of rewarding loan officers for high loan volume and intense competition for mortgage business among lenders may have also helped weaken standards. He said the Federal Reserve was considering banning some lending practices.

 


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