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Fed Chief Says Subprime Hangover Isn't Over Yet

Federal Reserve Board chairman Ben Bernanke warned that the worst is not over in the subprime sector and further reductions in subprime originations should be expected along with higher foreclosure rates.

"Decelerating house prices, higher interest rates and slower economic growth have contributed to rising delinquencies" on adjustable-rate subprime mortgages, the Fed chairman said in speech to an International Monetary Conference last week.

Serious delinquencies and foreclosures on subprime ARMs have doubled since mid-2005 and risen to about 12%, Mr. Bernanke said. "We are likely to see further increases in delinquencies and foreclosures this year and next as many subprime adjustable-rate loans face interest-rate resets."

The Fed chairman also suggested that the "retrenchment" in the subprime market is not over yet and it will continue to act as a restraint on housing demand and sales.

"The tightening of terms and standards now in train may well lead to some further contraction in nonprime originations in the period ahead," he said.

National Mortgage News survey data show that subprime originations declined by 16.4% in 2006 to $665 billion and a larger drop is expected this year.

The Fed chairman cited delinquency and foreclosure data on subprime ARMs provided by First American LoanPerformance.

The latest Friedman Billings Ramsey report on the performance of securitized mortgages also shows the default rate is near 12%, but it includes adjustable- and fixed-rate mortgages. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com