Fed warned of foreclosure crisis as loan growth slows

business

By Craig Torres and Carlos Torres
Bloomberg News
Denver Post
Article Last Updated:03/08/2007 10:00:37 PM MST

Federal Reserve Chairman Ben Bernanke and other policymakers were warned that rising mortgage foreclosures are likely to get worse, as the central bank on Thursday reported the slowest pace of loan growth in four years.

The Federal Reserve Board's Consumer Advisory Council, including consumer advocates and banks, met in Washington, with Bernanke and Fed Governors Susan Bies, Randall Kroszner and Frederic Mishkin in attendance. Home-mortgage foreclosures were the first agenda item, and the officials heard anecdotes of default and families at risk.

"We have found neighborhoods with abandoned homes, 200 at a shot," said Louise Gissendaner, senior vice president and director of community development in Cleveland at Fifth Third Bancorp, the 10th-biggest U.S. bank by assets. She said abandoned housing has "devastated our city to a great degree."

Mortgage borrowing rose by $792.5 billion last year, the smallest gain since 2002, according to the Fed's quarterly Flow of Funds report. The increase last quarter was the smallest since 1998, as two years of Fed interest-rate increases depressed loan demand and slowed the housing industry.

The Fed raised its benchmark rate to 5.25 percent in June, compared with an average target of 3.2 percent in 2005, a year when net new mortgage borrowing soared by a record $1 trillion. Economists surveyed by Bloomberg News expect the Fed will hold the rate through the third quarter, the median estimate shows.

Fed officials heard stories from Denver, Cleveland, Philadelphia and New York, where neighborhoods are deteriorating as borrowers struggle to pay loans or abandon their homes in foreclosure, a process where lenders take possession of property.

Bernanke and the other governors didn't comment on interest rates, the economy or the direction of regulatory policy. They listened to comments from advocates and bankers, who indicated that foreclosures are likely to increase further.

"We feel like a canary in a coal mine," said Stella Adams, executive director of the North Carolina Fair Housing Center in Durham. "It is sad for us to know that there are 1.2 million families at risk from foreclosure."

Some 1.2 million foreclosures were reported nationwide last year, up 42 percent from 2005, according to Irvine, Calif.-based RealtyTrac, which has a database on foreclosed properties.

Delinquency rates on real-estate loans rose to 2.11 percent for all banks last quarter, the highest in four years, according to Fed data unadjusted for seasonal patterns.

Much of the deterioration in mortgage quality was the result of subprime loans, or credits to borrowers with little or poor credit history. Banking regulators on March 2 issued proposed guidance on subprime mortgages.

Consumer advocates at Thursday's meeting said poor underwriting standards in the subprime market were behind the rising foreclosure rates.

"We are facing a foreclosure crisis in this country," said Adams. "There is a distinct problem in the subprime market that is contributing to the foreclosures."