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Last Updated: Thursday, 20 September 2007, 17:31 GMT 18:31 UK
Mortgage woes 'exceed forecasts'
Federal Reserve Chairman Ben Bernanke
Ben Bernanke has been applauded for cutting rates
Losses from sub-prime mortgages have far exceeded "even the most pessimistic estimates", US Federal Reserve chairman Ben Bernanke has said.

His comments to a US finance committee come two days after the Fed cut base interest rates to 4.75% from 5.25%.

The rate cut was made "to help forestall some of the adverse effects on the broader economy", he said.

That, along with pumping cash into the financial system, aimed to counter "significant market stress" he said.

Mr Bernanke was appearing before the House Committee on Financial Services.

We are committed to preventing problems from recurring, while still preserving responsible sub-prime lending
Ben Bernanke

However, unlike his Bank of England counterpart, Mervyn King, who was grilled by a committee of MPs on Thursday over troubles in the banking system, Mr Bernanke is not facing pressure.

"He's being applauded for taking timely precautionary measures," said the BBC's New York business correspondent Dharshini David.

"He injected cash into the money markets early on to ensure there was enough liquidity in the system, and cut the main interest rate once evidence was gathering to suggest that the financial crisis was taking its toll on consumer activity and confidence."

Repossessions set to rise

Mr Bernanke told the committee that US mortgage woes were set to continue - especially with adjustable rate mortgages (ARMs).

Proceedings for about 320,000 foreclosures - or repossessions - were begun in each of the first two quarters of 2007 he said, against an average of 225,000 per quarter in the past six years.

"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.

Mr Bernanke added that it was difficult to be precise about how many repossessions would take place, but he said that in normal circumstances about half of homeowners who were given repossession notices ended up losing their homes.

"That ratio may turn out to be higher in coming quarters because the proportion of sub-prime borrowers, who have weaker financial conditions than prime borrowers, is higher," Mr Bernanke said.

"We are committed to preventing problems from recurring, while still preserving responsible sub-prime lending."

Treasury Secretary Henry Paulson, who also spoke at the hearing, said he will consider allowing the two government-backed mortgage companies, Fannie Mae and Freddie Mac, to temporarily buy, bundle and sell as securities any loans exceeding $417,000.

The plan is being billed as a way to inject liquidity into the stretched mortgage market.

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