Bernanke sees chance of recovery in 2010

If measures to prop up banks, prevent foreclosures and stabilize the financial system succeed, there is a "reasonable prospect" that the current recession will end this year and that 2010 will be a year of recovery, Federal Reserve Chairman Ben Bernanke told lawmakers Tuesday.

Federal Reserve policymakers expect unemployment to grow from 7.6 percent at the end of 2008 to nearly 9 percent by the end of the year before easing in 2010, Bernanke said in his prepared remarks to the Senate Banking Committee.

Housing and mortgage markets have proved "a serious drag on the broader economy," Bernanke said. The downturn has hurt household wealth, and rising mortgage delinquencies have threatened the health of financial institutions.

"Recent data show that residential construction and sales continue to be very weak, house prices continue to fall, and foreclosure starts remain at very high levels," Bernanke said in presenting the Fed's Semiannual Monetary Policy Report to Congress.

The report noted that single-family housing starts fell to an annual rate of 460,000 homes during the fourth quarter, down about 75 percent from the high seen in mid-2005. Although the decline in new-home construction means less pressure on bloated housing inventories, it was also one of many factors contributing to what Bernanke called a "severe contraction" of the U.S. economy.

Sales of new homes were off 70 percent from their mid-2005 peak, the report said, while existing-home sales ended the year more than 30 percent below the highs of a few years earlier.

With home prices falling, lenders tightening standards and foreclosures on the rise, total household mortgage debt appears to have declined in 2008 for the first time since recordkeeping began in the 1950s, the report said.

Securitization of mortgages by Fannie Mae and Freddie Mac has fallen in recent months, with issuance of mortgage-backed securities just outpacing maturing issues so that levels outstanding have only inched up since the summer.

Issuance of Ginnie Mae securities backed by FHA loans continues to be strong, with FHA offering "an alternative source of mortgage financing for some nonprime and near-prime borrowers," the report said. However, FHA-backed loans have only partially offset the reduction in credit from other sources, largely because of the FHA’s relatively strict lending standards and higher costs, the report said.

Interest rates on 30-year fixed-rate mortgages eligible for purchase or guarantee by Fannie and Freddie have fallen a full percentage point since the Federal Reserve announced a program to purchase mortgage-backed securities issued by the government-sponsored entities.

But interest rates for nonconforming, "jumbo" loans have not come down as drastically, and the "extraordinarily wide spread" between the two rates is widening further. The high level of this spread reflects the absence of a secondary market for jumbo mortgages and increased aversion by banks to making potentially risky loans, the report said.

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