Bernanke assures Congress on mortgage crisis

WASHINGTON — Federal Reserve Chairman Ben Bernanke told Congress today that the credit crisis has created "significant market stress" and offered fresh assurances that regulators would take steps to curb fallout related to the mortgage mess.

Bernanke made the statement in testimony before the House Financial Services Committee. It came just two days after the Federal Reserve sliced a key interest rate by a bold half-percentage point to prevent the weight of housing and credit problems from sinking the economy. It was the first time in more than four years the Fed cut this rate.

"Global financial losses have far exceeded even the most pessimistic estimates of the credit losses on these loans," the Fed chairman said. The situation, he acknowledged, "has created significant market stress."

The meltdown in the housing and mortgage markets has shaken Wall Street and Main Street, and President Bush was asked at a White House news conference today to assess the chances of a recession. "I say that the fundamentals of our economy are strong," he replied. But the president did acknowledge problems in the housing market.

Bush said he looked forward to working with Congress to solve problems, but also said he would fight any move on Capitol Hill to raise taxes.

For his part, Bernanke promised lawmakers that the Fed will take steps to crack down on abusive or bad lending practices.

"The Federal Reserve takes responsible lending and consumer protection very seriously. Along with other federal and state agencies, we are responding to the subprime problems on a number of fronts," he said. "We are committed to preventing problems from recurring, while still preserving responsible subprime lending." The Fed has taken a number of steps already and other proposals are being considered.

Treasury Secretary Henry Paulson, who also appeared at the hearing, signaled that the administration would consider allowing the big mortgage companies Fannie Mae and Freddie Mac to temporarily buy, bundle and sell as securities any loans exceeding $417,000, known as "jumbo" loans.

The idea, which represents a policy change for the administration, is portrayed as a way to inject liquidity into the stretched mortgage market.

Paulson said the change involving jumbo loans could occur only in tandem with tighter oversight of the two government-sponsored mortgage companies.

Bernanke also weighed in, saying that if Congress were inclined to make let Fannie Mae and Freddie Mac buy jumbo loans, it should be done only on a temporary basis. He didn't specify how long that should be.

In his testimony, Bernanke did not offer new clues about the Fed's next move on interest rates. The Fed chief reiterated the rationale offered Tuesday for cutting rates, acknowledging that the financial turmoil has "increased the uncertainty to the outlook."

Foreclosures are at record highs and late payments are spiking. Lenders have been forced out of business and investors have taken huge financial hits. Lax lending standards during the housing boom came to roost after the housing bust. The carnage has been the most severe in the so-called "subprime" market, where mortgages are held by borrowers with spotty credit or low incomes. Many are at risk of losing their homes.

Analysts estimate that at least 2 million adjustable-rate mortgages will jump from very low initial teaser rates to higher rates this year and next. Steep prepayment penalties have made it difficult for some to get out of their mortgages. Some overstretched homeowners can't afford to refinance or even sell their homes.

Rep. Spencer Bachus, R-Ala., told Bernanke: "There is general agreement that abuses have occurred in the subprime market. There is widespread agreement that these are practices that should not be tolerated."

"Foreclosure isn't good for anyone," said Alphonso Jackson, secretary of Housing and Urban Development, urging lawmakers to move quickly on FHA reform.

Bernanke said he saw "no problem" with government efforts to help squeezed homeowners refinance. "We are trying in particular to make sure the economy is stable and that is the ultimate objective we have," he added.

Paulson said "there are a number of credit markets that are still not functioning as normal. They are operating under strains and stresses," he added. There has been some gradual improvement and officials are monitoring the situation closely, Paulson said.

There's been a big debate in Washington about how Fannie Mae and Freddie Mac could help out. The government Wednesday nudged up their investment caps, a move aimed at alleviating stress in the mortgage market.

The top executives at mortgage giants Freddie Mac and Fannie Mae testified that they stood ready to help cushion the shocks from a rising flood of mortgage foreclosures.

Daniel Mudd, head of Fannie Mae, said his agency continued to support an increase in its mortgage portfolio of 10 percent, much bigger than the 2 percent bump-up the mortgage giants' regulatory agency approved Wednesday.

"I am confident we could provide more liquidity help to the home finance market today without taking risks we are not capable of managing," Mudd said. "We are not the only answer to the liquidity crunch, but we can play a part in a measured, safe and sound way," he added.

Richard Syron, Freddie Mac's chief said:"We remain very dedicated to helping borrowers avoid foreclosures."

Meanwhile, the Fed is reviewing possible actions to help, and Bernanke said the board also is committed to providing more effective disclosures to help consumers defend against improper lending.

Bernanke's predecessor, Alan Greenspan, has been criticized for holding short-term interest rates too low for too long, feeding the housing boom. Asked if he thought that was the case, Bernanke said the "primary factor" was unusually low long-term interest rates seen in the United States and in many other countries at the time.

On another matter, Bernanke said the Fed is still keeping a close eye to make sure that inflation doesn't become a problem. Oil prices hit a record $81.93 a barrel on Wednesday.

Associated Press reporters Marcy Gordon and Martin Crutsinger contributed to this story.