Subprime Defaults Are `Beginning of Wave,' Fed Gov. Bies Says (Alison Vekshin and Anthony Massucci)

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``What's happening is the front end of this wave of teaser- rate loans that are coming into full pricing,'' Federal Reserve Governor Susan Bies said at a risk-management forum in Charlotte, North Carolina. ``So what we're seeing in this narrow segment is the beginning of the wave. This is not the end, this is the beginning.''

By Alison Vekshin and Anthony Massucci

March 9 (Bloomberg) -- The nation's banks are just beginning to feel the pain of defaults on risky mortgages they made at low introductory rates when housing prices were soaring, U.S. Federal Reserve Governor Susan Bies said.

Bies, who has been the Fed's top banking policy official in her tenure at the U.S. central bank, said today banks are likely to see more missed payments and foreclosures as consumers with weak credit histories begin to face higher monthly mortgage payments.

``What's happening is the front end of this wave of teaser- rate loans that are coming into full pricing,'' Bies said at a risk-management forum in Charlotte, North Carolina. ``So what we're seeing in this narrow segment is the beginning of the wave. This is not the end, this is the beginning.''

Bies's comments reflect growing attention among bank regulators to the turmoil in the so-called subprime mortgage market and its impact on consumers and U.S. lenders. Many subprime borrowers face large prepayment penalties they can't afford, and they can't refinance or sell their homes, she said.

Bies, 59, said regulators are concerned about ``payment shock'' in mortgage loans made to borrowers with weak credit histories whose payments surge after a low introductory period. These subprime adjustable-rate mortgages represent 7 percent of mortgages made in the last few years, Bies said.

U.S. bank regulators have been watching rising numbers of cases of missed payments and defaults in the subprime market since last spring, Bies said.