Fed's Kohn says unclear if home prices stabilizing

WASHINGTON (Reuters) - Federal Reserve Vice Chairman Donald Kohn said on Thursday there was no clear evidence the plunge in U.S. house prices was coming to an end.

"The jury is still out on whether housing prices are close to finding a bottom," Kohn said in prepared remarks for delivery at a Brookings Institution conference where he was commenting on a series of academic papers.

He said some researchers have noted some easing in the pace of home price declines in some markets but said mortgage conditions have tightened since spring and that may have a further impact on prices since it makes it harder for buyers to qualify.

Kohn said it would be helpful if banks and other lenders built up larger capital buffers during prosperous times so that adjustments could occur more smoothly when economic conditions are less favorable.

Currently, for example, the Fed has had to extend special credit facilities for lenders to cope with the possibility that their operating capital might be pinched during the current economic downturn.

That has led to some criticism that banks may make careless lending decisions because they count on the Fed to step in if they get in trouble.

"Larger buffers would help to offset the moral hazard that might have been created through the expansion of our liquidity facilities," Kohn said.

Despite the Fed's actions to add liquidity to markets, Kohn noted that a number of markets "remain disrupted and illiquid," though he defended the steps the Fed has taken.

"I believe they would have been even more illiquid and the risk of disruptive runs even greater without our various facilities; that's certainly what market participants are telling us," Kohn said.

He said that agreed with one researcher's observation that credit conditions are likely to remain restrictive for some time, a development that will hinder a return to normal economic conditions.

"The process of adjustment to a safer, more resilient financial system is going to take a while," Kohn said, without specifying how long he felt might be required.

(Reporting by Glenn Somerville; Editing by Jonathan Oatis)

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