WASHINGTON (Bloomberg) — Federal Reserve chairman Ben S. Bernanke issued a double-barrelled warning on the US economy, saying the housing market will continue to struggle and the Fed sees "significant risks" in the leveraged-buyout boom.Bernanke, speaking at a conference in Chicago yesterday, said curbs on subprime lending "are expected to be a source of some restraint on home purchases and residential investment in coming quarters". And he said the Fed is "beginning to look at" what he called "the risks that are associated with working with private-equity firms".

The Fed chief's comments suggest the central bank has raised its guard against a second credit bubble emerging in the form of leveraged buyouts at a time the US economy is dealing with the mortgage bust. Lawmakers and consumer advocates have blamed the Fed and other regulators for lax enforcement during the record $2.8 trillion mortgage surge from 2004 to 2006.

"You learn from experience," said John Lonski, chief economist at Moody's Investors Service Inc. in New York. "The theme here would be whenever you have higher-risk borrowing accelerate considerably, the risks of unexpected debt-repayment problems rise."

Curbs on subprime lending "are expected to be a source of some restraint on home purchases and residential investment in coming quarters," Bernanke said at the Chicago Fed Bank's annual conference on bank structure and competition. "We are likely to see further increases in delinquencies and foreclosures this year and next as many adjustable-rate loans face interest-rate resets."

The Fed chairman maintained his forecast that the slump in housing won't have a broader impact on the economy, comments that were echoed by former Fed chief Alan Greenspan yesterday. "We do not expect significant spillovers from the subprime market to the rest of the economy or financial system," Bernanke said.

Fed officials this year have cited the housing recession as a main risk to economic growth, which was the weakest in four years last quarter. Bernanke's comments yesterday reflect the consensus of policy makers that the downturn in housing is unlikely to cause consumers to cut spending.

Bernanke said banks are appropriately reducing credit to the market for securities backed by subprime mortgages.

Bernanke's comments follow remarks this week from New York Fed President Timothy Geithner, the central bank's chief liaison to Wall Street, that officials are "looking carefully" at the loans that finance leveraged buyouts. Banks are helping fund a record pace of takeovers this year, with the value of announced LBOs soaring 40 percent to $188 billion in the first quarter.

Leveraged buyout firms are private investment companies that use debt to cover about two-thirds of the price of their takeovers. The bonds and loans would be at risk if the acquired company runs into financial trouble and can't meet its obligations.

In some of the past year's biggest deals, including the LBO of TXU Corp., banks made short-term investments alongside the buyers in a new type of financing called "equity bridges." The claims of equity investors are behind those of lenders in case of companies filing bankruptcy.

Lawmakers fault the Fed for not publicly rebuking any bank for failing to follow up on guidance on mortgage lending practices. Bernanke said the central bank is reviewing its authority to prohibit specific practices.

"It is past time for action," Democratic Senator Christopher Dodd of Connecticut, who chairs the Senate Banking Committee, said in a statement yesterday. He said Bernanke "misspoke" because the central bank is required to write rules that protect home borrowers from "unfair or deceptive practices".

The Fed chairman yesterday stressed that the subprime mortgage market is already showing "signs of self-correction" and that markets work better than regulators when it comes to allocating capital.

The Fed's Open Market Committee has kept its benchmark lending rate at 5.25 percent for seven consecutive meetings and this month reiterated that inflation is its "predominant" concern. The Fed's preferred price gauge has stayed at the top or above the comfort range of at least a half-dozen policy makers for three years.

"Although a levelling-off of sales late last year suggested some stabilisation of housing demand, the latest readings indicate a further step-down in the first quarter," Bernanke said.

Subprime mortgages are extended at rates at least 2 or 3 percentage points above prime loans. Borrowers typically have poor or limited credit histories or high debt relative to income. About 14 percent of all first-lien mortgages were subprime loans last year, Bernanke said.

Delinquency rates on subprime mortgages rose to 13.3 percent in the final quarter of 2006, a three-and-half-year high. Foreclosure rates rose to 4.53 percent, the highest since the first quarter of 2004.

"The prime market is doing reasonably well," Greenspan, who retired in January 2006, said yesterday at a meeting hosted by the Atlanta Journal-Constitution in Atlanta. "Some people are holding off on purchasing homes. Even so, we are getting a gradual rise in the prime market."

Bernanke said demand for high-yielding bonds in capital markets played a role in the fall in loan standards as subprime mortgage lending expanded. "The practice of selling mortgages to investors may have contributed to the weakening of underwriting standards," Bernanke said.