Fed's Poole: Take care with new mortgage rules

SPRINGFIELD, Illinois (Reuters) - Lawmakers must not be too heavy-handed as they react to the collapse of the U.S. subprime mortgage market and end up closing this source of credit forever, a senior Federal Reserve policy-maker said on Thursday.

St. Louis Federal Reserve President William Poole said the subprime market was now basically shut and might never reopen if the regulatory backlash was too onerous.

"The public policy problem is the danger that with the sad record of so many mistakes and abuses in recent years, regulatory burdens to end the abuses will do so, but only at the cost of making subprime lending so costly and risky to lenders that they will have no interest in restoring this market," he said in speech at the University of Illinois-Springfield.

Subprime woes have inflicted billions of dollars of losses on financial institutions and sparked a credit crunch that many fear has tipped the U.S. economy into recession.

Poole, who retires from the Fed at the end of this month, did not directly address the economic outlook, but stressed the housing market's problems have been costly.

"The lessons have been expensive and painful and the pain is not yet over," he said. But like the technology stock collapse a few years ago, which destroyed many firms and left the best intact, Poole predicted that the most worthwhile parts of the market would survive.

"In time, I believe, we will find that the subprime sector of the mortgage market will be as normal as any other part of the mortgage market," Poole said.

(Reporting by Alister Bull; editing by Gary Crosse)