FDIC: Another Wave of Credit Stress is Coming

Friday, May 16, 2008

WASHINGTON -- The head of the Federal Deposit Insurance Corp said Friday that another wave of U.S. credit stress was coming, involving non-mortgage loans.

Sheila Bair, in remarks prepared for a Brookings Institution event, said delinquency rates were rising for construction and development lending as well as for commercial and consumer debt.

However, she said, U.S. banks are still healthy and in a much stronger position to weather the storm than they were during the savings and loan crisis of the 1980s.

"Data show there could be a second wave of the more traditional credit stress you see in an economic slowdown," Bair said. "The slowdown we've seen in the U.S. economy since late last year appears to be directly linked to the housing crisis and the self-reinforcing cycle of defaults and foreclosures, putting more downward pressure on the housing market and leading to yet more defaults and foreclosures."

Speaking to reporters after her speech, Bair said regulators are urging banks to raise capital and increase their loan loss reserves in the event construction and other loans turn sour.

Bair lauded efforts by Democrats and some Republicans in Congress to draft a bill offering federal mortgage assistance, but said "more proactive intervention" is needed to prevent home foreclosures.

She said low-cost government loans should be used to help borrowers pay down unaffordable mortgages, a plan she put forward last month as a way to help about 1 million homeowners.

Her plan, which is voluntary for the mortgage servicers, would be administered by the Treasury Department and require approval by Congress. It would apply to mortgages originated between January 1, 2003, and June 30, 2007.

"Over the past year, federal and state governments, and consumer groups have worked with some success to encourage the industry to modify loans," Bair said. "But it's just not happening fast enough. Given the scale of the problem, this cannot go on loan-by-loan as it has."

The FDIC insures deposits at more than 8,000 U.S. banks and thrifts and oversees the soundness of the institutions.

Earlier on Friday, the Commerce Department reported construction starts on new U.S. homes rose by a surprisingly strong 8.2 percent in April and applications for new building permits turned up for the first time in five months. New-home building has been hit hard by a wave of foreclosures for existing homes and big inventories of unsold homes.

Democrats and Republicans on the Senate Banking Committee on Thursday reached a deal for a broad housing rescue plan that would offer $300 billion in refinancing for distressed mortgages, according to housing industry sources.

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