We're watching subprime: Fed's Bies

CHARLOTTE, N.C. (Reuters) -- The Federal Reserve has been monitoring the U.S. subprime mortgage market for several months, Fed Governor Susan Bies said Friday.

The U.S. housing market slowdown has hit subprime borrowers as stagnating home prices since 2005 have limited the ability of homeowners with little equity to refinance or sell their property.

Federal Reserve Board Governor Susan Bies

Bies said subprime borrowers are "at risk" since housing prices are not going up as fast as they had previously. She was speaking at the Charlotte Branch Enterprise Risk Management Conference.

New Century Financial (Charts), the No. 2 subprime lender, which had previously revealed that it was the subject of a criminal probe and that its auditor had doubts about its ability to continue in business, announced Thursday evening it had stopped taking applications for new mortgages because of trouble raising financing.

And No. 6 subprime lender Fremont General (Charts) said a week ago it would exit the subprime market because of the demands of regulators and market conditions.

While it's the smaller subprime lenders whose shares have taken a beating, many of the nation's biggest financial services firms are also leading subprime lenders.

Other major subprime lenders include HSBC (Charts), which recently took a $10.6 billion charge for bad loans, mostly related to its subprime portfolio, as well as units of Dow components Citigroup (Charts), General Electric (Charts) and even General Motors (Charts).

Bies also said financial markets have withstood last week's unwinding of carry trades that saw sharp gains in the yen and steep losses in U.S. stocks.

Bies said if you look at last week's events, "financial markets have performed well."

She noted that the recent unwinding of carry trades served as a lesson to investors who had become complacent about the market's previously low-volatility environment. "Volatility will always be there."

On Wednesday, former Federal Reserve Chairman Alan Greenspan gave a speech in which he said the carry trade is still going strong but that at some point it has got to turn around.

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