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Housing Bubble Deflating: Will The Us Consumer Follow?
Prudent Bear ^ | September 10, 2002 | Marshall Auerback

Posted on 09/10/2002 1:49:01 PM PDT by AdamSelene235

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International Perspective, by Marshall Auerback

Housing Bubble Deflating: Will The Us Consumer Follow?

September 10, 2002

 U.S. consumer profligacy has persisted for so long that it is has become hard to envisage what would stop it in its tracks. All traditional determinants of spending have pointed to an imminent decline in consumption, yet none of these indicators have thus far been validated by sharp declines in expenditures. A historically anomalous willingness of US households to increase their rate of debt accumulation in order to stay on a rising path of consumption has been one of the most striking features of the US economy as have come into the 21st century.

Through Q2 2002, the financial balance of the US household sector remains in its worst position since the hoarding wave prior to the Korean War. The duration, if not the depth of household spending in excess of income flows during this past business cycle, is simply unprecedented. Declining stock wealth has not curbed the consumer?s animal spirits, despite record public participation in the equity market. Nor have record high debt levels per se because it is argued that lower interest rates have served to cushion the consumer?s debt burden (even if aggregate debt service to income is at an all time high). Consumer spending has risen despite declines in the various measures of consumer sentiment, so this appears to be yet another unhelpful indicator. 

The consumer?s perverse debt-laden rush toward the cliff face has really found only one cogent explanation, which has drawn the attention of an increasingly large number of analysts ? namely, the housing market bubble and the corresponding impact of mortgage refinancings. Until recently, the persistent appreciation in house prices has enabled the US consumer to treat his home virtually like a cash point machine.  Higher valuations have enabled American households to extract increasing equity from their respective homes, whilst declining interest rates through multiple mortgage refinancings have also helped to buttress consumer expenditures by lowering their interest rate bills. This has been made possible by very low nominal interest rates and aggressive policies of mortgage finance, orchestrated through the Federal Reserve and Government Sponsored Enterprises (GSEs), such as Fannie Mae and Freddy Mac.  US fiscal policy has also been very stimulative ? in a year and a half the fiscal balance has swung by a full 5 per cent of GDP. 

But there are some crucial differences today. Evidence is mounting that housing prices are peaking (thereby diminishing the scope for further equity extraction on the basis of higher valuations), and the comparatively low existing interest rate environment means that future cuts will give the consumer less bang for his buck in terms of savings on the interest rate bill. Generally speaking, Fed funds declining from 4.75 per cent to an existing 1.75 per cent will have a much greater impact than falls from 1.75 per cent to zero. 

There is an equally germane consideration: previous refinancing booms took place against the backdrop of an expanding economy, in which the one-off boost from mortgage refinancing occurred in the context of other cumulative dynamics of economic expansion, including rising house prices. This is precisely the opposite of current conditions which pertain today. In addition to intensifying recessionary pressures (reflected by substantial falls in the equity market), we are also confronted with an environment overlaid with the imminent prospect of war with Iraq, an event that has the potential for a further exogenous shock to expenditures.  In today?s post bubble environment, the fear of default must surely be viewed as an implicit cost that is now getting factored in to household portfolio decisions, especially given the deflation of equity wealth and the increasing signs that the housing bubble is losing altitude. Thus, the long-awaited rebuild of US household savings may be upon us ? a necessary precondition for future growth, but with wrenching adjustment implications today for the American economy, given the extent to which growth has hitherto been fuelled by private household consumption and the issuance of debt.

Figures from the House Price Index from the Office of the Federal Housing Enterprise Oversight show that since 1995 house prices have risen far in excess of the rate of inflation. Over this seven year period, home sale prices have risen by more than 47 per cent in nominal terms, an amount that is nearly 30 per cent above the rate of inflation. This run-up in housing prices has translated into an additional $2.7 trillion in housing wealth, more than $35,000 per average American home owner, compared to a scenario in which house prices had only kept pace with underlying inflation.

What has this meant in terms of US consumption? There have been some attempts to quantify the extent to which the housing market has shaped consumer expenditure patterns.  According to Alan Greenspan, 10% to 15% of the rise in housing wealth is consumed whereas only 3% to 5% of the rise in stock market wealth is saved. Since US households now have almost 50% more assets in housing than equity, then the ratio is about 4.5: 1. That is, a 1% rise year-on-year in house prices offsets a 4.5% year-on-year fall in equity prices). Based on this analysis, the current 7.1% median US house price inflation offsets a 33% year-on-year decline in equity prices. More optimistic still, a 2001 NBER paper by Shiller, Quigley and Case conclude that the housing wealth effect is 11% to 17% (internationally) and 9% to 11% in the US while the stock market wealth effect was just 2% (and with no statistical significance on the regression).

This analysis would certainly help to explain why the debt laden US consumer has not yet demonstrated a greater propensity to save. Quite simply, when consumers see their own homes appreciating in value, they feel less inclination to put aside income for the future. Largely as a result of this run-up in home prices, consumption has remained high and savings rates have remained miniscule, even though all other determinants of consumption (e.g. debt, falling equity prices, etc.) suggest that the opposite should be occurring at this juncture. 

It is fascinating to us that so many people are finally ready to accept the crucial importance of housing in fuelling this buying binge. For many years, Doug Noland?s assertion that the housing market and the concomitant mortgage refinancing boom was a key, yet substantially overlooked, determinant of consumer expenditures was a hugely controversial position.  But as evidence has mounted that this has indeed been the case, it has metamorphosed into a simplistic axiom to the effect that when mortgage refinancings rise, so automatically do consumer expenditures.  And mortgage refinancings have again been strongly on the rise since July.  Does this imply that another consumption boom lies ahead?

Ironically, just as this idea has become received wisdom, there are signs that consumer expenditure is finally faltering despite the increase in refi activity. Having previously minimized the importance of such activity, most of the analytical community on Wall Street now tends to view such activity in an isolated context, failing to observe such refi activity previously was taking place in the context of rising house prices and growing employment. There are many statistical and anecdotal signs, however, to suggest that housing prices have begun to roll over: softening prices of vacation homes, lengthening of houses on the market before sale, and a substantial build-up in housing ?inventory?.  Consider the following excerpt from a Rocky Mountain News story on the Denver housing market, which is typical of many municipalities:

'For sale' signs not adding up

Record 22,910 homes available; July report was off mark by 56%

By John Rebchook, Rocky Mountain News
August 29, 2002

If you think there are a lot more homes for sale in your neighborhood than
reported, you're probably right.

A record 22,910 unsold single-family homes and town homes are on the market
this month. A computer glitch discovered this week revealed a whopping 56
per cent discrepancy from the 14,717 unsold homes reported in July.

Because the glut of unsold homes is so much greater than previously
believed, it could force sellers to lower the asking price of their homes.
Combined with some of the lowest mortgage rates in nearly 40 years, falling
prices on a huge inventory of unsold homes could make this an ideal time to

"It is, if you have a stable income," said Byron Koste, head of the
University of Colorado Real Estate Center at the Leeds School of Business.
"If you don't, you're playing Russian roulette."

In July, 20,005 unsold homes and town homes were actually on the market,
according to a calculation by a veteran real estate agent, Norm Waugh...

 While home prices are hovering at record levels, Jerry McGuire says they're
heading lower.

A report to be released today will show the average price of a single-family
home sold in August is $274,802, slightly off the record $274,904 set in

Ed Jalowsky, a broker with Classic Advantage Realty, said the glut helps
explain why so many houses are languishing on the market.

"If I knew there were 50 percent more homes on the market than being
reported, I would have told my clients to lower their prices faster,"
Jalowsky said. "You have to. It's the law of supply and demand. The supply
is going up, and the demand is going down."

Waugh said it's hard to say how much of an impact the incorrect reporting of
the numbers has had on the market.

We have heard comparable anecdotes in markets as diverse as San Francisco, Tampa, and the Northeast. (To be sure, there are obviously going to be regional disparities within a country as large and geographically diverse as the US and, by extension, those regions that have not experienced anything like a housing bubble, will clearly not suffer from comparable deflationary after-effects.)  A recent report by Merrill Lynch has highlighted another risk which threatens to undercut the strength of the housing.  The report notes a surge since year end 2000 in home equity loan loss rates. Rob Parenteau of Dresdner RCM notes the ominous implications for the housing market (and, by extension, US consumption trends):

?If it becomes harder to securitize home equity loans in asset backed vehicles, banks will not be able to get these loans off these books as fast as they used to. They in turn are likely to become less willing to make home equity loans, or, at a minimum, are likely to engage in more serious credit analysis before making new home equity loans if it becomes harder to securitize them off their balance sheets. Quantity credit rationing to the household sector would be the result, which would seriously confound Chairman Greenspan's earnest efforts to sustain if not accelerate a housing bubble in the US. While it is too early to say this credit tripwire has been triggered, it bears close monitoring, since any threat to a US housing bubble is equally a threat to global economic recovery and so begs the double dip question.?

Needless to say, a consumer boom predicated on mortgage refinancing presupposes an ongoing ability to service one's mortgage. Even that is now coming into question. The percentage of first mortgage loans more than 30 days past due rose by 12 basis points in the second quarter to 4.77 per cent, the Mortgage Bankers Association of America said yesterday. The percentage of FHA loans that are delinquent rose to a record high 11.81, the trade group said. The group's quarterly survey also showed the number of home loans on which foreclosure was started rose to its highest quarterly rate ever at 0.4 per cent. That this is occurring with mortgage rates at forty year lows provides eloquent testimony to the parlous state of the American consumer's personal balance sheet.

Why have people focused so much on the refinancing issue? According to one estimate of CSFB economist, Paddy Jilek, the refinancing wave in the US could add as much $250bn to $300bn to consumers' discretionary cash flow (up from $150bn last year). At this stage, however, the more germane question is what consumers will actually do with the incremental cash. For there is increasing evidence to suggest that acute debt distress, coupled with an apparent peak in many regional housing markets, is leading to an increased propensity to save, rather than spend. Certainly, the deceleration in revolving credit growth from double digit year on year growth rates last year to near 25 year lows (around 2.5%) indicates that consumers are finally paying back debt.

Of course, one could make the contention that just as analysts underestimated the impact of mortgage refinancings on past consumption trends, so they are guilty of overestimating its impact this time around.  Mortgage refinancings give households a one shot opportunity to cash out and spend.  When the refinancing surge reverses, all things being equal, consumer spending should fall. But those optimistic about the US economy might still seek to argue that one should not necessarily view this fall as an ominous portent for future US economic growth, because in the past once the effects of such refi booms have been passed on, the economy did not collapse.

It is true that prior historical episodes with refinancing surges do not reveal immediate subsequent significant declines in consumer spending.  A recent study on US consumption by Frank Veneroso explains why:

?The Fed lowers rates and refinancings surge.  And stock prices rise.  And firms hire and employment expands. And firms need more capacity and have the profits to finance more capacity and so capital spending rises in turn.  The Fed ease that triggers the refinancing surge sets into motion the cumulative dynamics of an economic expansion. Consumer expenditures derived solely from cash outs from mortgage refinancings do abate.  But in the many other ways associated with cumulative expansions consumer incomes and sentiments are lifted and so consumption expenditures are kept on an upward path... Consumer spending growth seems to track employment growth more closely than refinancings, suggesting that the impact of the cumulative dynamics of an economic expansion impact consumer spending in large part via employment conditions.?

Veneroso highlights a crucial point overlooked by many: most mortgage refinancings in the past took place in the context of a strong economy, coupled with reasonable employment growth. Today?s current round of refi activity is happening in an economy in which the cumulative dynamics of an economic expansion are not taking place; quite the contrary in fact. Stock prices have been falling. Capital expenditure is still being cut back. Corporate profits are still falling. And (despite last week?s employment report), the trend toward higher unemployment is unmistakable. Today?s refi activity in fact looks more like a desperate attempt by the consumer to build a liquidity net egg, akin to Minsky?s description of Ponzi-finance in which one uses the flows of further debt issuance (as opposed to cash flow) to service existing borrowings. This is inherently unsustainable; clearly one cannot continue to borrow at 6.75 per cent and stick the money in savings accounts yielding less than 2 per cent. The US consumer, laden with debts taken on in the euphoria of the late 1990s, therefore remains exceedingly vulnerable to further retrenchment if these adverse trends continue.  If the urge to save replaces the consumer?s unsustainable willingness to splash out, the US recovery, indeed, much of the global recovery, will be sunk. If this occurs against the backdrop of sharply rising oil prices and a war, another global economic downturn would be all but certain.

The Japanese economy experienced simultaneous bubbles in its housing and stock markets in the late eighties. The collapse of these two bubbles has left Japan?s economy nearly stagnant for more than a decade. The United States faces the same sorts of risk from the collapse of its stock market and housing bubbles (both of which are symptoms of the larger credit bubble). The evidence suggests that it is far too simplistic to presuppose that a refinancing boom will usher in another period of booming consumption in the absence of further cumulative dynamics of economic expansion, particularly rising employment. It was poor economic policy to allow these bubbles to develop in the first place. Yet policy makers in America continue to display a curious reluctance to acknowledge past errors; they appear more interested in rewriting history to exculpate themselves. This leaves one less hopeful that the right policy mix to deal with the collapse of these bubbles will be found any time soon.





TOPICS: Business/Economy; Extended News
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1 posted on 09/10/2002 1:49:01 PM PDT by AdamSelene235
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To: AdamSelene235
I need a little help from a nice freeper out there. Does anyone know a good book on either finance or economics that would be easy to read and follow for an student in the 8th grade. Long story short, friend of mine wants to teach her son some economics and also some finance, since all he hears is socialist dribble in school. Its got to be a short, simple to read and easy to follow book. I recommened one book (wall street guide to personal finance), but that book if definatley dull, but still easy to follow, any one have any recommendations?
2 posted on 09/10/2002 1:58:34 PM PDT by Sonny M
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To: AdamSelene235
Our housing bubble is not nearly so huge as that in the U.K. and Germany to name two. So the fall will not be that hard either. Some really frothy markets like Silicon Valley might become a bloodbath, but Main Street USA will not see a big crisis in this.
3 posted on 09/10/2002 2:01:54 PM PDT by eno_
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To: Sonny M
Economics in One Lesson, by Henry Hazlitt. Not too long, brilliant, but easy for most readers, and, surprising for a book about economics, interesting. Hazlitt uses everyday examples to debunk a lot of socialist "thinking" in economics. Retails on Amazon for $10 or $15, I believe. I just bought four copies a couple of weeks ago, because I've given so many copies away to friends. Hope this helps!
4 posted on 09/10/2002 2:03:21 PM PDT by nravoter
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To: AdamSelene235
this makes a lot of sense generally. However, in my area,
housing inventory is low and demand is high.
I suggest the
problem is that homeowners are re-financing in order to
get cash, since their credit cards are maxed out. this is
not healthy for the economy or for consumers.
5 posted on 09/10/2002 2:04:53 PM PDT by upcountryhorseman
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To: Sonny M
milton friedman's 'Free To Choose' is always a good one. It's easy to read, about 200 pages I think, very popular.
6 posted on 09/10/2002 2:17:00 PM PDT by Red Jones
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To: Sonny M
Thomas Sowell put out a basic economics book recently.

That is good that your friend is endeavoring to teach his children basic economics. Econ 101 was the first influence that turned me from a MASH and All In The Family watching indoctrinated lefty to a conservative.

The law of supply and demand alone refutes about 60% of leftist arguments.

7 posted on 09/10/2002 2:24:49 PM PDT by Check_Your_Premises
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To: eno_
So the fall will not be that hard either.

May effect a few over-financed individuals. I think that long term, the graph will still go up and to the right.
8 posted on 09/10/2002 2:25:37 PM PDT by AdA$tra
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To: Sonny M
I would recommend the books by Robert Kiyosaki. I apologize that I can't remember the exact titles. One is something like "Rich Dad, Poor Dad," and the other is has the words "Cashflow Quadrant" in its name. You can probably find them in the library (that's why I can't remember the title -- I borrowed, as opposed to buying the books!), or at the Elijah Company website (a homeschool resource place- easy to look up on the web). The Kiyosaki books address the exact issue you mention -- explicitly educating kids on finance, and the old fashioned American free market notions. Kiyosaki also has a Cashflow game for adults, one for kids, which looks like something I'll invest in when my kids are older --hands-on way to teach financial wherewithall.

The Elijah company also lists several other similar resources on the finance front and for other topics. I think you will find a wealth of info for the enterprising parents seeking to combat socialist indoctrination in that Elijah Company catalogue (it's good reading, in and of itself). I apologize I don't have the website address, but a quick search should get you there. The catalogue is free.

9 posted on 09/10/2002 2:33:17 PM PDT by elk
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To: Sonny M
I need a little help from a nice freeper out there. Does anyone know a good book on either finance or economics that would be easy to read and follow for an student in the 8th grade.

Investment Biker by Jim Rogers.....An around the world motorcycle adventure and economics lesson all in one book.

David Friedman (far more articulate than his father Milton) - Hidden Order is an excellent economics text. The Machinery of Freedom is probably the best political/economic text I've ever read.

Now if you really want to corrupt the boy, get him Robert Heinlein's The Moon is a Harsh Mistress. (not an economics text per se, but my favorite for corrupting the youth...heinlein should be a controlled substance)

10 posted on 09/10/2002 2:33:58 PM PDT by AdamSelene235
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To: Sonny M
Ditto's on the recommended Friedman\Sowell. Friedman not only single handedly debunked Keynesian socialist economic policy but most of his stuff is a nice easy read. I echo the sentiments that reading Friedman turned me into a conservative overnight.
11 posted on 09/10/2002 2:34:02 PM PDT by MattinNJ
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To: Sonny M
Whatever Happened to Penny Candy by Richard J. Maybury is a great book for explaining economics to both young and old. My children have learned alot from it, as have I. It is an easy read, about 120 pages long. A couple of quotes on the back cover......"Must reading for anyone who wishes to understand the basics of our free enterprise system" (William E. Simon, former U.S. Secreteary of the Treasury...and...."Probably the best short course in economics around (Doug Casey).
12 posted on 09/10/2002 2:39:22 PM PDT by sangoo
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To: Sonny M
An OK one is "Economics in One Lesson" by Henry Hazlitt, although it dribbles off some after the first few chapters. "Free to Choose" by Milton Friedman explains the market pretty well, while "Economists on Trial" by Mark Skousen is also pretty good.

For a general history of the U.S. economy, see my book, "The Entrepreneurial Adventure: A History of Business in the U.S." (Harcourt, 2000)

13 posted on 09/10/2002 3:11:07 PM PDT by LS
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To: AdA$tra
May effect a few over-financed individuals.

Might also effect the MBS market, which would take out the GSEs, which would take out the bond, stock and real estate markets simultaneously. There is a reason banks have multiplier restrictions. Pity the GSEs do not.

14 posted on 09/10/2002 3:12:25 PM PDT by AdamSelene235
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To: Sonny M
some economics and also some finance,


Here's a site that has many financial definitions/applications and links to further discussions (YAHOO-FINANCE

Investing Investing 101
Beginning Investing, Bonds, Choosing a Broker, DRIP & DSPP Plans, Investment Clubs, Mutual Funds, Options, Stocks
Personal Personal Finance 101
Banking, Choosing a Broker, Insurance, Loans, Managing Debt, Real Estate, Retirement, Taxes

Glossary Financial Dictionaries
Financial Glossary, Bonds, Insurance, Options, Taxes
Store Finance Bookstore
General, Business, Finance, Investing, Personal Finance

15 posted on 09/10/2002 3:14:26 PM PDT by Stand Watch Listen
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To: eno_
This is purely anecdotal, but here in the southern Ohio (Cincinnati/Dayton) growth area, home prices have been stable for YEARS and houses sell pretty fast. Just last week there were about 4 in our neighborhood. All sold. They are all selling at about purchase price, so I don't see (and never saw) the "housing run up" this article talks about except in California.

It is something of a myth, though, that Americans "don't save." Most Americans have medical covered through "forced savings" at work; they have retirement handled through "forced pensions" and Social Security---rightly or wrongly, they contribute money that they might not otherwise, and that IS a form of savings; and homes are usually a reason people save---but if mortgage interest deductions makes it logical to purchase homes on time, the incentive to save for that is gone.

When you factor medical "savings," pension and SS "savings," and the mortgage interest rate factor (and I have seen a study on this), guess what? Americans save about as much as everyone else. Now, granted, some countries have "forced" savings that exceed ours, but usually not private medical or retirement plans. If the main three things people "used" to save for are now handled by "forced savings," saving does not become that important. My parents saved to buy 1) a house; 2) to retire; and 3) for medical emergencies. Well, those things are all dealt with differently now. I'd prefer to go back, but it is delusional to pretend that the "forced savings" do not exist or are not having real economic effects.

16 posted on 09/10/2002 3:17:01 PM PDT by LS
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To: LS; Sonny M
An OK one is "Economics in One Lesson" by Henry Hazlitt, although it dribbles off some after the first few chapters. "Free to Choose" by Milton Friedman explains the market pretty well, while "Economists on Trial" by Mark Skousen is also pretty good.

Try Milton's son David. He is far more lively and articulate than his father(and often riotously funny). Hidden Order and the Machinery of Freedom are both good reads.

17 posted on 09/10/2002 3:18:28 PM PDT by AdamSelene235
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To: AdamSelene235
The Wall Street Journal

September 10, 2002


More Fall Behind on Mortgages,
Stoking Housing-Market Jitters


Dow Jones, Reuters
Dominion Homes Inc. (DHOM)
U.S. dollars
3:59 p.m.

* At Market Close

When Krista and Scott Mullins saw housing prices in the San Diego area spiraling upward in late 2000, they knew they had to move fast to buy a bigger home. "Would we be able to afford a house if we waited?" fretted Mrs. Mullins.

On a grassy one-acre spot in Vista, about 40 miles north of San Diego, they found a renovated house that was perfect for their two children. The asking price of $292,000 would double the couple's mortgage payments. But "surely, the bank wouldn't give us a loan if we couldn't afford it," Mrs. Mullins thought.

 Housing Boom Softens Blow Of Tanking Stock Portfolios1
 How to Keep That Great Rate? Tips for the Refinancing Masses2
 Homeowners Refinancing Loans Push Appraisers to Go Yet Higher3
 A House Is Definitely a Home -- And Maybe a Risky Investment4
 Low, Lower, Lowest: Profiting From Falling Mortgage Rates5
 Borrowers Beware Extra Costs Tucked Into No-Fee Mortgages6

Enter an eager loan officer who helped the couple package their application. She showed them how to get a loan despite their high credit-card debt, and pushed them into a higher-interest-rate loan, the Mullinses say.

Last month, the couple filed for personal bankruptcy.

In recent years, the housing industry has bent over backwards to allow people like the Mullinses to buy houses they couldn't previously afford. Lenders require smaller down payments and allow buyers to devote more of their income to mortgage payments. And many borrowers are being lured by adjustable-rate mortgages with low teaser rates that quickly climb, pushing up house payments.

Now, the bill is coming due. In the second quarter, a record 1.23% of all home loans were in the foreclosure process, above the first quarter's tally of 1.10%, and surpassing the previous record of 1.14% in the first quarter of 1999, according to a report released Monday by the Mortgage Bankers Association of America, an industry group. That same report found 4.77% of all home loans outstanding were at least 30 days delinquent. That's one of the highest rates of the last decade, though it's well below the record delinquency rate of 6.07% in 1985.

The growing number of distressed borrowers is heightening fears that the nation's red-hot housing market is poised for a correction. If the delinquency rate worsens, lenders could tighten lending standards, making it harder for many potential home buyers to get financing and resulting in a weaker overall housing market. That would be bad news for the economy since surging housing prices are a big reason that consumers have kept spending even as the stock market has slumped.

Part of the reason the housing market got so hot is that lenders rushed out loans designed to cut monthly payments so that buyers could get bigger homes. It is some of those very loans that are now experiencing problems. One indication: Conventional adjustable-rate mortgages, popular with budget-stretched customers, currently have a 5.25% delinquency rate vs. a 2.75% rate for conventional fixed-rate mortgages.

In addition, credit counselors say they are getting more calls from people who are struggling to make their house payments. Auriton Solutions, a nonprofit credit-counseling agency based in St. Paul, Minn., says it now receives about 400 such calls a month, up from just 100 a month a year ago.

Doug Duncan, chief economist at the Mortgage Bankers Association, attributes the rising delinquency rate to the dual forces of a recession and a "huge innovation" in mortgage loans. Still, Mr. Duncan maintains that the slew of mortgage products have allowed people who were traditionally shut out by lenders the chance to become homebuyers.

Others see it differently. The realtor or loan officer says, "'Let's get them into a different kind of loan,' even if they know [the borrower] can't afford it," says James Croft, executive director of Mortgage Asset Research Institute, a Reston, Va.-based organization that tracks mortgage-industry fraud.

A Blurry Line

The line between loan deals that help consumers and those that hurt them can be blurry. Homebuilder Dominion Homes offered a temporary interest-rate discount a few years ago to lure marginal buyers into a new tract just outside Columbus, Ohio. That kept buyers' monthly payments attractively low during the first year. But now, the owners' monthly payments have shot up, and some residents have had to abandon their homes.

That's what happened to Rob Jones, a 50-year-old help-desk employee and his wife, a merchandise handler for Sears. In the summer of 1998, the couple turned to Dominion after another homebuilder rejected them for a loan because they owed $10,000 on car and credit-card bills. Dominion offered the Joneses a loan that shaved three percentage points off the going interest rate if they purchased a home in the builder's Southfield Village development. The catch was that the rate increased by a percentage point in each of the next three years.

The couple's monthly payments were $650 in the first year, but rose in the third year to $1,100, including higher-than-expected property taxes. The couple's income didn't keep pace. Last fall, the Joneses had to declare personal bankruptcy and give up their house. "I feel now that I wasn't told everything upfront," Mr. Jones says.

Today, nearly half of the 15-or-so homes on the Jones's block are empty or for sale. Dominion Homes defends its role, saying it was merely administering a government program backed by the Federal Housing Authority. The federal agency stopped the program in 1998 after determining it was "too aggressive," says Lori Steiner, a senior vice president for Dominion.

Aggressive lending practices tend to correlate with hot housing markets. In San Diego, for instance, the 22% year-over-year rise in the median home price to $368,000 has outpaced the roughly 4% increase in residents' median annual income to $49,000 over that period, says John Burns, a real estate consultant in Irvine, Calif.

Springboard, a nonprofit credit counseling service in Southern California, says that so far this year it has helped about 500 homeowners with mortgage-payment problems, a 67% increase from last year.

In the San Diego county town of Vista, the Mullins think their broker nudged them into a home they couldn't afford. The couple, who are in their 30s, had racked up $20,000 in credit-card debt after buying their first home in 1999. Mr. Mullins figured that monthly mortgage payments on the Vista home would eat up about 60% of their take-home salary and exceed the 36% of gross income that once was the banking industry's usual limit.

The couple say their broker, Patty Villanueva, steered them toward a "stated income program," which allows borrowers to simply write their income on an application without submitting tax returns. The interest rate on a stated-income program is between an eighth of a percentage point and one percentage point above the conventional rate.

Ms. Villanueva, who is self-employed, tells a somewhat different story. She says the couple's loan was approved based on their consumer credit score, which was good enough to qualify them for the "stated income program." The Mullinses' financial problems today are due to their free spending ways, not their mortgage payments, she says.

The Mullinses say their spending, which led to $50,000 in credit-card debt, has been mostly for home repairs and necessities such as kid's shoes and groceries.

-- Patrick Barta and Ruth Simon contributed to this article

Write to Queena Sook Kim at

URL for this article:,,SB1031597325139734995.djm,00.html

Hyperlinks in this Article:

Updated September 10, 2002

18 posted on 09/10/2002 3:22:04 PM PDT by TroutStalker
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To: LS
It is something of a myth, though, that Americans "don't save." Most Americans have medical covered through "forced savings" at work; they have retirement handled through "forced pensions" and Social Security---rightly or wrongly, they contribute money that they might not otherwise, and that IS a form of savings;

Unfortunately these savings simply do not exist. Social Security has been raided so many times it is now just a stack of IOU's. Benefits will either be reduced or the government (since it is the largest debtor in the room) will inflate its way out of the problem.( I assuming inflation is still possible??) Either way the weakest players will get screwed, as always.

19 posted on 09/10/2002 3:25:36 PM PDT by AdamSelene235
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To: Sonny M
can't go wrong with Milton Friedman. Free to Choose was written to educate the masses. a little out of date maybe, but the principles haven't changed.
20 posted on 09/10/2002 3:37:59 PM PDT by babble-on
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