Fed Chairman Ben Bernanke acknowledged that the housing market is cooling, but he still thinks that it will make a soft landing.

"It seems pretty clear now that the U.S. housing market is cooling," Bernanke said. "Our assessment at this point ... is that this looks to be a very orderly and moderate kind of cooling."

Bernanke indicated that the Fed is keeping an eye on the housing market to gauge its effect on the overall economy. If the housing market does crash hard, the Fed will likely adjust its interest rate policy.

Bernanke, speaking at a real estate conference, called on banks to tighten lending standards when it comes to non-traditional mortgages such as interest-only loans, reports the Financial Times. Interest-only loans accounted for 30% to 40% of loans last year - well above their historic average.

"We do have some concerns about the non-traditional mortgage lending," remarked Bernanke. "We are not saying that you shouldn't make these loans; we are saying you need to make them right."

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In other words, these loans are fine for qualified borrowers who have the income to afford them, but they may not be appropriate for lower-income buyers. As housing prices skyrocketed over the past couple of years, buyers turned to these types of loans so that they could make lower the monthly payment.

Bernanke said that the Federal Reserve plans to issue guidance to banks regarding these loans, as rising interest rates could expose banks to higher default rates.

Editor's note:
Alan Greenspan Warns of Housing Bust, Worse....
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