Mortgage foreclosures worsening, Fed warned

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

At a meeting on Thursday of the Fed's Consumer Advisory Council, the officials heard anecdotes of default and families at risk.

Mortgage borrowing rose by US$792.5 billion (S$1.2 trillion) 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 per cent in June, compared with an average target of 3.2 per cent in 2005, a year when net new mortgage borrowing soared by a record US$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 Cleveland, Philadelphia, Denver and New York, where neighbourhoods are deteriorating as borrowers struggle to pay loans or abandon their homes in foreclosure, a process where lenders take possession of property.

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

Around 1.2 million foreclosures were reported nationwide last year, up 42 per cent from 2005, according to RealtyTrac, which has a data base on foreclosed properties.

Delinquency rates on real estate loans rose to 2.11 per cent 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 due to subprime loans, or credits to borrowers with little or poor credit history.

Some 2.2 million borrowers are at risk of losing their homes and at a potential cost of US$164 billion from subprime mortgages originated from 1998 to 2006 inclusive, according to a December study by the Centre for Responsible Lending, an advocacy group also based in Durham.

On Thursday, New Century Financial, the No. 2 US subprime lender whose shares have plunged by almost 90 per cent this year, halted new loans and lined up almost US$1 billion in new funding to help it stay in business.

Still, analysts do not anticipate that banks will begin to curtail credit more broadly because of problems in the market for riskier mortgages.

'Fixed-rate loans, which make up roughly two-thirds of US mortgage originations, should perform well in the absence of a major labour-market slump,' Goldman Sachs Group economist Andrew Tilton wrote in a note to clients on Wednesday.

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