The Federal Reserve's chairman has said the US central bank acted to cut interest rates and add liquidity to the financial system in recent weeks in the face of 'significant market stress'.
Ben Bernanke's remarks came in testimony to Congress. He said the economy and markets reacted to surprisingly large losses in the area of sub-prime mortgages that 'have far exceeded even the most pessimistic estimates'.
Appearing in the House Committee on Financial Services, Bernanke said the worst of the mortgage maelstrom was not yet over, as more homeowners face difficulties making payments on adjustable rate mortgages (ARMs).
'With house prices still soft and many borrowers of recent-vintage sub-prime ARMs still facing their first interest-rate resets, delinquencies and foreclosure initiations in this class of mortgages are likely to rise further,' he said.
Bernanke said about 15% of ARMs to sub-prime lenders with weak credit were in delinquency or foreclosure in July, and that about 320,000 foreclosures were initiated in each of the first two quarters of the year, up from a previous average of 225,000.
Bernanke spoke two days after the Fed cut its base federal funds rate by half a point to 4.75% to help ease some of the negative effects on the broader economy which might arise from disruptions in financial markets.
Bernanke told the committee that the fragmented nature of the mortgage industry had made regulation difficult.
