Greenspan, regulators raise volume of housing alarm

[ckramer]

Federal Reserve Chairman Alan Greenspan this week added to a chorus of worry about the growth of home loans seen as far riskier than the 30-year mortgage that has been U.S. housing's bedrock for decades.

Those alternatives, called "exotic" by the Fed chief on Thursday, have played a big role in sustaining the four-year housing boom by making homes more affordable, which in turn stoked demand and drove prices higher and higher.

But these hundreds of alternative mortgage products have also injected more risk into the market -- both for lenders and borrowers, according to regulators and some analysts.

Of most concern are loans that require little downpayment and delay big principal payments, leaving homeowners highly leveraged for longer just as rates appear poised to rise.

"The dramatic increase in the prevalence of interest-only loans, as well as the introduction of other relatively exotic forms of adjustable-rate mortgages are developments of particular concern," Greenspan told Congress.

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[BagEnd]

1. "just as rates appear poised to rise."

Been hearing that for at least two years now.

I don't consider the interest-only product to be "riskier" (in most cases) unless it's combined with an ARM (in which case, it's the ARM that is the problem).

And obviously an ARM is not a "bad" thing if used properly (say, if you only intend to live somewhere for a few years).

[phantom power]

2. That depends.

It's all good, as long as housing prices continue to rise, and interest rates are low.

In a scenario where the housing bubble pops, it's likely that interest rates will go up, AND housing prices will fall. People with ARMS could end up trapped with a high interest rate, and unable to sell their home.

Interest-only mortages don't seem like a very good deal to me. You don't build up any equity. You might as well pay rent.

[BagEnd]

5. There is not such animal

as a "housing bubble". At least not at a national level. And if there were, we wouldn't be close to it. The median family pays a MUCH smaller portion of their income on the median home than they did in the 80's or 90's.

At worst, we'll see a few years of little to no growth (say at or below the inflation rate).

Now... in a few truly heated markets, things are likely to "pop" with noticeable declines in prices. In which case, you're 100% correct on the effect of ARMs in a rising-rate market.

As for the equity-building comment. You're right.... but remember that a traditional mortgage doesn't pay off a whole lot of principle during the first few years either. The market (one way or the other) is going to do far more to your equity position than the principle payments will. The problem comes when people used the lower monthly payment to qualify for more than they could otherwise buy. I use one because the difference goes into savings.

[phantom power]

6. Opinions differ on that.

Greenspan appears to agree with your assessment. Housing bubbles are localized. Paul Krugman is less optimistic.

The state of California appears to be one large bubble. Relative to the entire country, I guess that's "localized", but it's still pretty big.

I live in the Phoenix valley, where the real-estate market is beginning to look a little bit like CA, maybe that skews my viewpoint. I used to live in the rural north-east, where the housing market is pretty depressed (and the rest of the economy, for that matter), so things aren't the same everywhere.

As a disaster-prediction hobbyist, I'm always happy when events prove me wrong.

[David Zephyr]

4. Interest only loans are great bridge loans for people between properties.

Interest only loans are a great tool for home buyers who are selling and buying at the same time. They can afford to buy with an interest only loan and then later, after taking their time to get the highest offer for their old home, they can re-finance the new home for a 15 or 30 year fixed loan, drop a bigger down payment at the same time and secure a lower monthly payment.

Interest only mortgage loans are just a financial tool that most every other business and financial organization use. Only now, it is available to we commoners when we are buying homes.

And even the criticisms against the new 40-year loans fall flat to me because someone would be better paying a 40 year mortgage with interest and tax deductions than renting for 40 years.

Now, on the other hand, those in overly developed regions and where apartment rental vacancy rates are high and where residential home inventory is also high (Dallas and Houston) and where there is a history of over-building for speculation, I'd be weary about taking an interest only loan there if I knew I couldn't convert it to a fixed mortgage rate within six months.

I'm certain that Mr. Greenspan himself in his many years of banking and business has used interest only short term loaning.

There's nothing "exotic" about it at all.

[pinerow]

3. These "exotics" are this biggest hand-job

being foisted on the 'gotta-have-it-now' folks..but trust me...the chickens will come home to roost.