Heading Off Home Foreclosure Damage on Fed’s Radar Screen
In testimony before the Joint Economic Committee of the U.S. Congress, Federal Reserve Chairman Ben Bernanke last week indicated that the nation’s central bank continues to watch the fallout of problems with the subprime mortgage market on the financial markets and economic growth and is also focusing its efforts on reducing foreclosures on homes.
Echoing comments made earlier in the week by Fed Governor Randall S. Kroszner at NAHB’s Symposium on Housing Affordability (click here for NBN story in this issue), Bernanke in his Nov. 8 remarks noted that rising foreclosures could further threaten the U.S. economy as it is expected to move into a slower phase.
With 450,000 subprime mortgages per quarter scheduled to undergo their first interest rate reset from now until the end of next year, more borrowers will likely experience payment shock and become delinquent in making their monthly loan payments, he noted.
“Should the rate of foreclosure rise proportionately, communities as well as individual borrowers would be hurt because concentrations of foreclosures tend to reduce property values in surrounding areas,” he said. “A sharp increase in foreclosed properties for sale could also weaken the already struggling housing market and thus, potentially, the broader economy.”
In recent months, Bernanke noted, the Fed and other banking agencies have been attempting to limit the damage of foreclosures by calling on mortgage lenders and services to pursue prudent loan workouts.
“Our contacts with the mortgage industry suggest that servicers recently have stepped up their efforts to work with borrowers facing financial difficulties or an imminent rate reset,” Bernanke said. “Some servicers have been proactive about contacting borrowers who have missed payments or face resets, as experience shows that addressing the problem early increases the odds of a successful outcome.”
FHA Modernization in the Hands of Congress
Congress also has an opportunity to reduce home owners’ risk of foreclosure by modernizing programs administered by the Federal Housing Administration, he said.
“The FHA has considerable experience helping low- and moderate-income households obtain home financing, but it has lost market share in recent years, partly because borrowers have moved toward nontraditional products with more-flexible and quicker underwriting and processing and partly because of a cap on the maximum loan value that can be insured,” he said.
“In modernizing the FHA, the Congress might encourage joint efforts with the private sector that expedite the refinancing of subprime loans held by creditworthy borrowers facing resets. It might also consider granting the agency the flexibility to design products that improve affordability through such features as variable maturities or shared appreciation. Also, the FHA could provide more refinancing options for riskier households if it could tailor the premiums it charges to mortgage insurance to the risk profile of the borrower.”
On the overall health of the economy, despite subtracting about one full percentage point from overall growth in this year’s third quarter, the decline in residential construction failed to significantly slow consumer spending, which was supported by gains in employment and income, or reduce growth in capital spending by businesses, Bernanke said, and growth for the period was a “solid” 3.9%.
Slower Economic Growth Ahead
However, looking ahead, the Federal Market Open Committee (FOMC) saw signs that the economy would be slowing in the final months of the year.
“Indicators of overall consumer sentiment suggested that household spending would grow more slowly, a reading consistent with the expected effects of higher energy prices, tighter credit and continuing weakness in housing,” he said. “Most businesses appeared to enjoy relatively good access to credit, but heightened uncertainty about economic prospects could lead business spending to decelerate as well.”
The Fed is now expecting sluggish growth during the first half of 2008, “then strengthening as the effects of tighter credit and the housing correction begin to wane.”
In his Nov. 7 “Eye on the Economy,” NAHB Chief Economist David Seiders forecast that overall GDP growth would slip to about 1.5% in the fourth quarter, “but we also expect growth to pick up early next year and we believe recession will be avoided during the 2008 to 2009 forecast period.”
Following the FOMC’s half-point reduction in the federal funds rate target on Sept. 18 and an additional one-quarter point cut at the conclusion of its Oct. 30-31 meeting, another one-quarter point cut is likely at the Dec. 11 FOMC meeting, followed by stability in 2008, Seiders predicted.
“The Oct. 31 FOMC statement noted that ‘the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction’ — a judgment consistent with our economic and housing forecast,” Seiders said.
“Despite this outlook on housing and the economy, the FOMC statement expressed the judgment that ‘the upside risks to inflation roughly balance the downside risk to growth.’
“We view this balanced risk assessment as a strategy by the Fed to give themselves maximum flexibility in altering short-term rates and to control speculation about future policy adjustments,” Seiders said.
ARMs Rates Decline
Released on Thursday, Freddie Mac's weekly Primary Mortgage Market Survey showed that the latest interest-rate cut by the Fed helped reduce rates on adjustable-rate mortgages as long-term mortgage rates eased slightly over signs of a weaker economy.
Thirty-year fixed-rate mortgages averaged 6.24% last week, down from 6.26% the previous week and 6.33% last year at the same time.
One-year Treasury-indexed ARMs averaged 5.50% last week, down from 5.57% during the previous week and 5.55% a year earlier. This was their lowest level since the week ending May 17.