Tighter standards in subprime lending — along with bad publicity that may keep eligible borrowers from applying for loans — will continue to restrain demand for housing, Federal Reserve Chairman Ben Bernanke told international bankers Tuesday.

Speaking via satellite to bankers and policy makers attending the International Monetary Conference in Cape Town, South Africa, Bernanke said it’s unlikely that troubles in subprime mortgage lending will “seriously spill over to the broader economy or the financial system.”

Bernanke said that while a leveling-off of sales late last year hinted at a possible stabilization of housing demand, more recent readings indicate demand weakened further over the first four months of the year.

“As you know, the downturn in the housing market has been sharp,” Bernanke said. “From their peaks in mid-2005, sales of existing homes have declined more than 10 percent, and sales of new homes have fallen by 30 percent.”

Home prices “decelerated sharply” last year, Bernanke said, after appreciating at a rate of 9 percent from 2000 to 2005. Prices continue to be “quite soft” so far this year, although outright price declines have been concentrated in markets that showed large increases in earlier years.

Single-family housing starts are down by one-third since early 2006, knocking 1 percentage point from growth in gross domestic product over the past four quarters. Despite the drop in home building, the inventory of unsold new homes has risen to more than seven months of sales, well above the average for the past decade, Bernanke said.

The adjustment in the housing sector is still ongoing, “and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected,” Bernanke said.

Decelerating house prices, higher interest rates and slower economic growth have contributed to an increased rate of delinquency among subprime borrowers, Bernanke said.

The rate of serious delinquencies for subprime mortgages with adjustable interest rates — mortgages in the foreclosure process or with payments 90 or more days overdue — has risen to about 12 percent, roughly double the recent low seen in mid-2005

The problems are showing up almost entirely among borrowers with adjustable-rate mortgages, with delinquency rates for fixed-rate subprime mortgages remaining generally stable.

As a result, investors who fund mortgage lenders are scrutinizing subprime loans more carefully, and lenders have tightened up their underwriting standards, Bernanke said.

“Tighter lending standards in the subprime mortgage market — together with the possibility that the well-publicized problems in this market may dissuade potentially eligible borrowers from applying — will serve to restrain housing demand, although the magnitude of these effects is difficult to quantify,” Bernanke said.

Subprime and near-prime mortgage originations rose sharply in 2004 and 2005 and likely accounted for a large share of the increase in the number of home sales over that period. But originations of subprime purchase mortgages appear to have peaked in late 2005 and declined substantially since then, Bernanke said.

That means some of the impact problems in subprime lending have had on housing demand has probably already been felt, Bernanke said. Key indicators such as the gross issuance of new subprime and near-prime mortgage-backed securities suggest that the supply of subprime mortgage credit has been reduced, but “has by no means evaporated.”

Nevertheless, “the tightening of terms and standards now in train may well lead to some further contraction in nonprime originations in the period ahead,” Bernanke said. “We are also likely to see further increases in delinquencies and foreclosures this year and next as many subprime adjustable-rate loans face interest-rate resets.”

Bernanke said that eventually, fundamentals like growth in incomes and relatively low mortgage rates should prop up demand for housing.

But the problems in the subprime sector are “causing real distress for many homeowners,” and the Federal Reserve and other regulators are encouraging lenders to work with borrowers who may be having trouble making their mortgage payments.

Bernanke outlined four approaches being considered by regulators to prevent a repeat of the problems the lending industry is currently struggling with. Regulators can bolster required disclosures by lenders, beef up rules to prohibit abusive or deceptive practices, implement principles-based guidance with supervisory oversight, and launch less-formal efforts to work with industry participants to promote best practices, he said.

Regulators and lawmakers “must walk a fine line” in drafting new rules, Bernanke said. “We have an obligation to prevent fraud and abusive lending; at the same time, we must tread carefully so as not to suppress responsible lending or eliminate refinancing opportunities for subprime borrowers.”

Bernanke made similar warnings last month after coming under fire from lawmakers who complained regulators haven’t done enough to stop the most abusive lending practices.

One area that needs to be addressed is the patchwork nature of enforcement authority in subprime lending, Bernanke said. Rules issued by the Federal Reserve Board under the Home Ownership Equity Protection Act apply to all lenders, he said, but are enforced by the Federal Trade Commission, state regulators, or one of the five federal regulators of depository institutions, depending on the lender.

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