Bernanke allays subprime fears as Beazer faces probe

By Julie Haviv

NEW YORK (Reuters) - Testimony by the two top U.S. economic officials Wednesday raised fresh concerns in financial markets about the deteriorating housing market, despite their view that subprime mortgage problems are "contained."

The practices of lenders in the $1 trillion subprime sector have drawn scrutiny from regulators and law enforcement officials who believe some borrowers have been fraudulently induced to take on more debt than they can handle.

While most of the activity has involved civil actions, the No. 6 home builder in the country, Beazer Homes USA Inc., said it has received a request for documents from federal prosecutors in a probe relating to its mortgage business, sending its shares down as much as 11.8 percent.

The builder specializes in lower-priced homes, the sector of the market where subprime lending has been most prevalent. The FBI said it was looking at "a potential fraud investigation" into Beazer.

The financial markets' worst fear has been that problems with subprimes -- loans aimed at borrowers with weak credit -- will spill into the overall housing sector and push the slowing economy into reverse.

Federal Reserve Chairman Ben Bernanke said in testimony to Congress that the impact of the problem has been "moderate" in the big picture, and U.S. Treasury Secretary Henry Paulson said the problem "appears to be contained."

Paulson, testifying before a House Appropriations subcommittee, said the Treasury was monitoring housing market developments closely but was encouraged by signs that the housing downturn was at or near a bottom.

"This is a complicated issue, but from the standpoint of the overall economy, my bottom line is we're watching it closely but it appears to be contained," he told the panel's financial services and general government subcommittee.