Fed Sees Limited Housing Fallout

   

Excerpt From The Wall Street Journal-

Risks to Broader Economy
From Market’s Downturn
Remain a Top Concern

By SUDEEP REDDY
September 7, 2007; Page A2

Several Federal Reserve officials said the housing market’s downturn and recent market volatility have created risks to the broader economy, but that so far the fallout has remained relatively contained.

The Fed policy makers, speaking at unrelated events yesterday, endorsed views they have received from businesses across the country indicating limited impact from the recent credit crunch.

TALKING POINTS

 

 

The Good News: Fed officials said fallout from housing- and credit-market problems so far appears to have had limited impact on the broader economy.

The Bad News: That could change if mortgage woes continue and hurt the housing market further, they noted.

The Bottom Line: The latest comments suggest central bankers remain cautious about making aggressive rate cuts.

Tightening credit conditions and growing trouble for the housing sector have added to worries about the overall economy. Some analysts expect the rising number of mortgage-payment delinquencies and falling home prices to eat into household wealth and constrain consumer spending, which accounts for more than two-thirds of the nation’s economic activity.

Fed officials yesterday acknowledged that concern. “If current conditions persist in mortgage markets, the demand for homes could weaken further, with possible implications for the broader economy,” Fed governor Randall Kroszner told a San Francisco audience.

The Federal Open Market Committee is set to meet Sept. 18 to discuss interest rates. Markets expect the central bank to lower the benchmark rate from the current 5.25%, but the extent of the expected cut isn’t clear. The latest comments suggest officials remain cautious about making aggressive rate cuts.

Policy makers at the meeting will have little data to assess the effect of last month’s market volatility on the broader economy. Some reports have suggested limited fallout from the credit crisis, though the job market has showed signs of softening. The biggest effect has been in housing, where home sales are slowing while delinquencies continue to rise.

The Mortgage Bankers Association yesterday said a record number of American homes entered the foreclosure process in the second quarter as homeowners with adjustable-rate mortgages continued to fall behind on payments. (See related article.) Of the 44 million home loans included in the trade group’s National Delinquency Survey, 5.12% were past due, or delinquent, on a seasonally adjusted basis, compared with 4.84% at the end of the first quarter. Meanwhile, 0.65% of the nation’s homes entered foreclosure during the quarter, topping the 0.58% record set in the first quarter.

William Poole, president of the Federal Reserve Bank of St. Louis, said there is “no question” that recent market turmoil would worsen conditions in the U.S. housing market, but that the effect on the broader economy was less clear.

“I think the probability of recession is higher than it used to be,” Mr. Poole said following a speech in London. He added that there is anecdotal evidence and also some formal data “suggesting there is a further leg down in the housing market.”

A reduction in household wealth, in part from slower home-equity withdrawals, “could pull down overall household spending,” Atlanta Fed President Dennis Lockhart said.

Fed officials are watching economic data and anecdotal reports closely for signs of a shift, he said in a speech in Atlanta, adding, “So far, I have not seen hard or soft data that provide conclusive signs that housing problems are spilling over into the broad economy.”

Most of the U.S. economy “is doing reasonably well,” said Thomas Hoenig, president of the Kansas City Fed, suggesting that the housing-related problems haven’t spread. “We still have good export demand for our goods, which is helping our manufacturing and carrying it, so I don’t see that it has carried over at this point,” he said in an interview with PBS’s Nightly Business Report.

Officials continued to raise the “moral hazard” concern, indicating that they don’t want to be seen as rescuing investors who took excessive risks.

Mr. Lockhart said policy “should enable natural market functioning,” though actions may be necessary to address concerns about financial-system stability as seen with last month’s liquidity crisis.

“Market participants should expect and actually experience accountability for their decisions through natural market processes,” he said. “Intervention can distort risks and create incentives to take exaggerated investment positions.”

The Mortgage Bankers Association report showed that markets across the country are turning in widely different performances. In Mississippi, for example, 9.33% of all loans were delinquent, while 21.5% of subprime loans, or those to borrowers with poor credit, were delinquent. In Oregon, just 2.44% of all loans were delinquent, and 8.72% of subprime loans were past due.

The report indicated that California, the nation’s biggest state, is a top concern. The report said that 17% of all subprime loans and 19% of all foreclosure starts in the second quarter were in California.

Nationally, the worst-performing sector was subprime adjustable-rate mortgages, with 16.95% of such loans past due, up from 15.75% in the first quarter and 12.24% a year earlier. Among prime adjustable-rate mortgages, 4.15% were past due, up 54% from the second quarter of 2006.

 

–Natasha Brereton, Andrew Peaple and Damian Paletta contributed to this article.

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One Response to Fed Sees Limited Housing Fallout

  1. Wahoo says:

    Thank you for sharing!

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