Mortgage fears likely overblown

NEW YORK — Wall Street shuddered when two hedge funds managed by Bear Stearns Cos. buckled from exposure to subprime loans, but economists say investors’ reaction might be overblown.

At first, the news this past week seemed alarming. Shareholders of Bear Stearns found out Tuesday that two of its hedge funds were rendered practically worthless by wrong-way bets in complicated mortgage securities. Then, a few days later, several top U.S. banks said they’ve added to reserves to withstand loan defaults expected in the second half of the year.

But there were calming words from Federal Reserve Chairman Ben Bernanke, who said during congressional testimony that while there will be significant losses from the subprime market, he still views them as bumps along the road. And economists agree that losses from subprime mortgages won’t likely trigger a systemwide credit crunch.

“There’s a chance investors have been overreacting,” said John Lonsky, chief economist at credit-rating agency Moody’s Investors Service. “You don’t want to be too cavalier about the difficulties with subprime, but you also need to realize it is going to take more than a subprime meltdown to trigger a recession and send your broad equity markets 10 percent or 20 percent lower.”