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Thursday, May 17, 2007

Bernanke: The Subprime Mortgage Market

by Calculated Risk on 5/17/2007 10:50:00 AM

Remarks by Fed Chairman Ben Bernanke: The Subprime Mortgage Market

The recent sharp increases in subprime mortgage loan delinquencies and in the number of homes entering foreclosure raise important economic, social, and regulatory issues. Today I will address a series of questions related to these developments. Why have delinquencies and initiations of foreclosure proceedings risen so sharply? How have subprime mortgage markets adjusted? How have Federal Reserve and other policymakers responded, and what additional actions might be considered? How might the problems in the market for subprime mortgages affect housing markets and the economy more broadly?
Short answer according to Bernanke: everything will be fine. See Bernanke's speech for his longer answers.

Tanta provides the translation (from the comments):
CR quoted the first paragraph. Here's how the rest of it goes:

2. Technology lets us find more subprime borrowers faster.
3. Securitization lets us find more bagholders faster.
4. We made a lot more loans this way.
5. Ownershipsocietyminoritypoorpeoplehelpedfeelgood.
6. Somehow, subprime borrowers still default more than prime borrowers do.
7. Number 6 is a recent problem.
8. ARMs have rates that go up, and home prices don't always rise. This is new, too.
9. Some of that loan underwriting was also kind of sucky.
10. It paid to make junk loans if you didn't have to own them.
11. Apparently some borrowers didn't get the memo.
12. Hedgies are bailing out the CDOs, so there's still some party left in the punchbowl. So far the banks can pass a breath test.
13. Even though this isn't a bank problem, the Fed is working with banks to help solve it.
14. We think someone should buy out those crappy securities and start modifyin', baby.
15. For some reason these borrowers think the lenders want to foreclose. Sure, it looked that way when the loan was made, but it's different now. Please call your lender, it's ready to make nice.
16. We're snorting a fine line here.
17-22. The best solution is to disclose to the borrower that these loans rarely make sense. It would be bad to ban them entirely, because they often do make sense.
23-24. We are also guiding the underwriting of the banks that aren't the ones making these loans.
25-26. None of this will affect the home market unduly, because jobs and wages will go up.
27-28. The market will correct any problem we can't mop up with disclosure requirements.