In an interview with The Wall Street Journal (subscription required), Paulson said, "The nature of the problem will be significantly bigger next year because 2006 (mortgages) had lower underwriting standards, no amortization, and no down payments. He added that "We'll watch carefully mortgages that will be reset."
Home prices fall
Paulson's comments came before the National Association of Realtors announced that home prices had fallen in 51 of 150 U.S. metropolitan areas in Q3, with the median sales price falling to $220,800 in Q3 2007, compared to $225,300 in Q3 2006. The NAR also announced that home sales fell to an annualized rate of 5.42 million units, including single-family homes and condominiums, compared to a 6.29-million-unit annualized rate a year ago.
Analysts say the combined statistics suggest that the housing slump that started in 2006 is likely to continue until at least mid-2008, and most likely considerably longer, and will also serve to restrict U.S. economic growth.
The housing sector is a pivotal component in the U.S. economy not solely for the transaction value of real estate and mortgage financings, but also because housing affects demand in companion sectors: furniture, appliances, home improvement, and home services, among other sectors. As such, increasing house sales almost always stimulates U.S. economic growth; decreasing sales almost always lowers U.S. economic growth.
Seeking better rates
Paulson said the Treasury Department is now aggressively encouraging the mortgage servicing sector to develop criteria that would enable more subprime and near-subprime borrowers who may be headed toward default to qualify for loans with better terms, The Journal reported. Many economists now expect the housing sector's sluggishness to lower U.S.GDP by up to 1 percentage point, or to roughly 1.8%-2.3% GDP growth in 2008.
Further, the specter of an increased number of subprime defaults in 2008 -- if Paulson's prediction proves to be accurate -- suggests that housing's drag-effect may intensify in 2008, particularly if measures are not put in place to help borrowers who to date have represented a considerable portion of mortgage defaults: those borrowers with interest rates that have been reset to higher rates.
Estimates vary industry-wide, but up to two million mortgages are due to reset to higher rates by the end of 2008.
Although Paulson stopped short of endorsing a proposal by Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., to have mortgage companies freeze the interest rates on mortgages due to reset to higher rates between now and the end of 2008, he said that's "one idea," according to the Journal article.
Economic Analysis: Sec. Paulson appears to be bracing the markets -- and possibly the U.S. Congress -- for more housing fallout. The secretary's effort to encourage the mortgage servicing sector to help large pools of at-risk borrowers will help, but as housing and mortgage payment data amasses, it's becoming more-clear that some type of additional mortgage insurance and/or expanded secondary mortgage market purchase program will be needed to both de-concentrate subprime mortgage risk and maintain sufficient mortgage market liquidity.
The housing sector is a pivotal component in the U.S. economy not solely for the transaction value of real estate and mortgage financings, but also because housing affects demand in companion sectors: furniture, appliances, home improvement, and home services, among other sectors. As such, increasing house sales almost always stimulates U.S. economic growth; decreasing sales almost always lowers U.S. economic growth.
Seeking better rates
Paulson said the Treasury Department is now aggressively encouraging the mortgage servicing sector to develop criteria that would enable more subprime and near-subprime borrowers who may be headed toward default to qualify for loans with better terms, The Journal reported. Many economists now expect the housing sector's sluggishness to lower U.S.GDP by up to 1 percentage point, or to roughly 1.8%-2.3% GDP growth in 2008.
Further, the specter of an increased number of subprime defaults in 2008 -- if Paulson's prediction proves to be accurate -- suggests that housing's drag-effect may intensify in 2008, particularly if measures are not put in place to help borrowers who to date have represented a considerable portion of mortgage defaults: those borrowers with interest rates that have been reset to higher rates.
Estimates vary industry-wide, but up to two million mortgages are due to reset to higher rates by the end of 2008.
Although Paulson stopped short of endorsing a proposal by Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., to have mortgage companies freeze the interest rates on mortgages due to reset to higher rates between now and the end of 2008, he said that's "one idea," according to the Journal article.
Economic Analysis: Sec. Paulson appears to be bracing the markets -- and possibly the U.S. Congress -- for more housing fallout. The secretary's effort to encourage the mortgage servicing sector to help large pools of at-risk borrowers will help, but as housing and mortgage payment data amasses, it's becoming more-clear that some type of additional mortgage insurance and/or expanded secondary mortgage market purchase program will be needed to both de-concentrate subprime mortgage risk and maintain sufficient mortgage market liquidity.
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Reader Comments (Page 1 of 1)
11-21-2007 @ 7:49PM
william lindblad said...
Hmmmmm!!!!
All this tells me is that Paulson has an average I.Q. He just told the majority of this country something that we all know.
Think about this statement when you cross bridges.
11-23-2007 @ 12:02AM
Charles B. Atkins said...
Mr. Paulson hit the nail on the head when he referred to the need for lenders to adjust their rates on the loans headed for foreclosure. Most banks are willing to work with borrowers to assist them paying their mortgages. They certainly don't want to to be in the real estate business resulting from foreclosures. This procedure should go a long way in resolving some of the sub prime loan problems. Lets hope the lenders wake up and recognize this need before its too late.
11-23-2007 @ 11:30AM
steveinDenver said...
The concept of underwriting got lost between the guy who wrote the applications and the investment bankers. I'd suggest the industries responsible (Realtors, builders, mortgage brokers, appraisers, wholsesalers and investment bankers) collectively take REAL and QUICK steps to fix their errors and eat what bad news they have to. This will put them in a position to start dealing with the vast sea of pettyfoggers who are preparing to feast on their irresponsible butts. If trial lawyers are true to their breed, we all know this subprime nonsense is like manna in a pigs trough to them.