March 1 (Bloomberg) -- Federal Reserve officials don't expect mounting losses on subprime adjustable-rate mortgages to lead to a credit crunch that could significantly harm the U.S. economy.

Nor is there concern at the central bank that the losses will threaten financial institutions.

In contrast, worries about both of those possibilities have been heard with increasing frequency since last month when about 20 subprime lenders shut down and others reported large losses.

Fed Chairman Ben S. Bernanke acknowledged the losses in testimony before the Senate Banking Committee on Feb. 14. Nevertheless, he said, ``I don't think it has, at this point, implications for the aggregate economy in terms of the ongoing expansion.''

He reiterated that view yesterday in an appearance before the House Budget Committee.

In a Feb. 20 talk to students at Duke University's Fuqua School of Business, Fed Governor Susan Schmidt Bies explained why the Fed is much less concerned than some investors and analysts.

Bies stressed that subprime ARMs represent only about ``seven to eight percent of all outstanding mortgages.'' Furthermore, the delinquencies are concentrated mostly in those issued last year, she said.

``If you look at what's happening in mortgage markets this year, what you see is, in the aggregate, the mortgage markets are doing very well in terms of credit quality,'' Bies said.

Subprime mortgages are given to people with poor or limited credit records or high debt and at higher interest rates.

Limited Impact

Some Wall Street analysts, including economists Torsten Slok of Deutsche Bank Securities and Richard Berner of Morgan Stanley, also doubt that subprime mortgage delinquencies will be a problem for the economy.

In a note to clients on Feb. 23, Slok said households with ARMs, both prime and subprime, whose interest rates will adjust upward in 2007 and 2008 ``will experience about a $10 billion increase in payments.''

That increase ``is small relative to overall consumer spending of about $9 trillion in 2006 -- about 0.1 percent,'' Slok said. ``Resets will account for a larger share of consumption by low-income families, but still'' about only 1 percent of spending by this group.

``ARM resets should have a very limited impact on consumer spending and overall growth,'' Slok concluded.

``In sum, ARM resetting is likely to cause problems for some subprime borrowers, but as long as unemployment remains low and household balance sheets remain strong, we do not see it as a concern for the Fed,'' he added.

`Idiosyncratic Event'

Berner's comments on Feb. 26 focused on credit markets.

``Fears persist that the subprime mortgage meltdown will usher in a broader credit crunch, spreading first to prime mortgages and ultimately to corporate credit,'' Berner said. ``I think that the subprime crash is an idiosyncratic event, but that indicators of credit quality and credit availability bear watching.''

So far they are looking good, he said.

``There's scant evidence yet of a broader deterioration in credit quality or availability, except in lower-rated mortgages. Corporate credit is near-pristine, although earnings growth is slowing sharply.''

``Delinquencies and charge-offs are near record lows, risk spreads continue to tighten and commercial lending standards remain loose,'' Berner said.

So, unless one focuses narrowly on recently issued subprime ARMs, there aren't warning flags waving in the credit markets.

More Guidance Coming

Some observers concerned that the subprime problems may affect a broader swath of the credit market point to the Fed's January senior loan officer survey, which showed a sharp swing from banks loosening mortgage lending standards to tightening them.

That shouldn't have come as a surprise since the Fed and other federal agencies regulating financial institutions directed several months ago that those lending standards be tightened.

In her talk, Bies, who has resigned her seat on the Fed Board effective March 31, said more such ``guidance'' is on the way ``to again remind people about the basics of good underwriting and sound disclosure.''

She also pointed out that federal guidance can't reach most companies that originate mortgage loans.

``Three out of four mortgages that are made are made by a person who is not employed by a bank or a savings and loan,'' Bies said. ``So these are people who are hired and are employed by a mortgage broker, finance company, someone who's making them a loan.'' And those loans are routinely packaged and sold into the secondary market.

Absorbing the Hits

That means that the risk inherent in the mortgages has been widely spread ``not only throughout the U.S. in terms of different kinds of investors, but it's being held by people now who are generally more able to absorb hits,'' she said.

That only one-fourth of mortgages -- and a much smaller share of subprime ARMs -- are issued by financial institutions is a reason to doubt that a credit crunch is likely.

Slok, in his memo, said he sees the tightening reflected in the survey ``largely as a movement back toward more normal lending practices,'' and doubted it would hurt the economy. He also said that tighter standards for mortgages haven't spilled over to credit cards or other consumer loans.

None of this is to deny that the plunge in the housing market has been a major drag on economic growth, or that it won't continue throughout this year.

It would be a serious mistake, however, to assume that the losses in the subprime market are a portent of things to come in the rest of the housing sector, much less the broader economy.

(John M. Berry is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: John M. Berry in Washington at jberry5@bloomberg.net.

Last Updated: March 1, 2007 00:15 EST