Refining a repeated warning, Federal Reserve Board Chairman Alan Greenspan told bankers Saturday to be careful underwriting loans to low-income consumers.
Delinquency and default rates are up on subsidized mortgages and those with high loan-to-value ratios, Mr. Greenspan said. Bankruptcy rates and credit card delinquencies also are near all-time highs, he said.
"Some problems are occurring that should alert us all to potential dangers," Mr. Greenspan said in remarks prepared for the Greenlining Institute's annual conference in San Francisco. "While every potential problem doesn't result in disaster, it's important to recognize the risksand take protective steps."
These were Mr. Greenspan's first extensive comments on credit quality among low-income borrowers, although he has raised red flags on general underwriting practices. He did not specify what steps lenders should take to protect their portfolios. Comptroller of the Currency Eugene A. Ludwig has repeatedly warned bankers during the past year to protect the quality of their conventional, small-business, and low-income loan portfolios.
Mr. Greenspan also urged bankers to consider what happens to consumers who get more credit than they can afford. These consumers likely will default and ruin their credit ratings if they lose their job or incur unexpected car or home repair expenses, he said.
"While we should applaud the democratization of our credit markets over the years," he said, "we must be vigilant of the risks of excess, both by lenders and consumers."
Despite the warnings, Mr. Greenspan generally praised the massive expansion of credit to middle- and lower-income consumers.
"The good news is that market specialization, competition, and innovation have vastly expanded credit availability to virtually all income classes," he said. "Access to credit is essential to help families purchase homes, deal with emergencies, and obtain goods and services that have become staples of our daily lives."
He noted that homeownership has set a new record and that the number of mortgages received by low-income families has grown rapidly during the past five years. Also, almost every household qualifies for a credit card, he said.