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| The chairman of the Federal Reserve Board told a group of bankers this week that while home equity has fueled recent consumer spending, an increase in mortgage rates would change the landscape.
The value of owner occupied residences in the U.S. has grown from $8 trillion in 1995 to $18 trillion as of June 2005, Federal Reserve Chairman Alan Greenspan told the American Bankers Association yesterday. But mortgage loans against those homes have accumulated at a much faster pace. “In the United States, signs of froth have clearly emerged in some local markets where home prices seem to have risen to unsustainable levels,” the chairman said. “It is still too early to judge whether the froth will become evident on a widening geographic scale, or whether recent indications of some easing of speculative pressures signal the onset of a moderating trend.“ The frenzied activity has been driven by a drop in mortgage rates — even as the Federal Open Market Committee embarked on its current cycle of policy tightening, Greenspan said via satellite at the group’s annual conference in Palm Desert, Calif. “This decline in mortgage rates and other long-term interest rates in the context of a concurrent rise in the federal funds rate is without precedent in recent U.S. experience,” he said. “The apparent froth in housing markets may have spilled over into mortgage markets,” the Fed chief added. Greenspan indicated a jump in interest-only and exotic ARM originations leaves those borrowers and their lenders at much greater risk in the event of a broad decline in home prices. Less than 5% of borrowers currently have loan-to-values above 90 percent, the chairman noted, but this figure may be masked by rapid appreciation that has pushed down the average LTV for all transactions. Estimated LTVs are highest in states with little appreciation and lowest in states such as California and Massachusetts. Cashout represents about 80% of total mortgage production, according to a transcript of the speech. About a quarter to a third of home equity loan proceeds pay for personal consumption expenditures directly, while another quarter is used to payoff nonmortgage debt — which the chairman noted was also used for personal expenses. Greenspan said financed personal spending has depleted personal savings, but indicated a rise in mortgage rates would lead to an increase in the personal savings rate, a decline in the U.S. trade deficit and a decline in the current account deficit. HMDA data indicate second home originations rose from 7% of total purchase production in 2000 to twice that at the end of last year — and possibly higher, according to the speech. Piggyback second mortgages have been particularly high in Texas, California, Utah, Oregon, and Colorado, Greenspan said, and it is possible that home equity lines of credit are being used as piggybacks by some borrowers. |
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Sam Garcia has been in mortgage lending since 1980, and is publisher of MortgageDaily.com, MortgageChronicle.com, FraudBlogger.com and CloserBlog.com. email:Â [email protected] |
