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“Mortgage Market Fault Line”
Summary of Remarks by
Mark Zandi
Chief Economist
Moody's Economy.com
April 5, 2007
Dr. Zandi spoke about housing: in particular, about recent increases in delinquencies and foreclosures, and their effects on the housing market and overall economy.
Data from Equifax show steep, recent declines in mortgage credit quality. California, Florida, Michigan and even Las Vegas, NV show particularly surprising increases in delinquency rates.
The erosion of credit quality is not even across mortgage types. It is steepest among sub-prime adjustable rate mortgages. Dr. Zandi predicts the share of such mortgages in delinquency and foreclosure will not stop increasing until 2008. The share of prime and Alt-A loans at risk are expected to increase as well, but less dramatically.
A large share of foreclosures and delinquencies are occurring now because many such loans are at the point in their cycles where the terms of the mortgages are resetting; that is, borrowers are finding their monthly mortgage payments higher now. Such risky loans account for a quarter to a third of all outstanding mortgages, a share that has increased sharply these past few years.
The standing of homeowners is also at risk as house prices in over half of the metropolitan areas are declining. In part this is due to excess housing inventory. According to current Census figures, there are about 200,000 housing units to be absorbed. As such, builders are expected to be easing off construction. Still, more areas are expected to see home price declines in the next few months.
The recent declines with mortgage credit quality may only be the beginning. They could exacerbate if interest rates increase or the job market falters. At the same time, mortgage lenders are currently tightening underwriting standards, making it more difficult for homeowners at risk to refinance their loans.
There are several tools the government could use to help mitigate the declines in mortgage credit quality. The Federal Housing Administration could expand their programs to help those at risk. The Fed could also lower interest rates aggressively to help borrowers reset to more favorable terms. Lowering interest rates could spur inflation, however.
Indeed, it is difficult to deal with these problems. On the one hand, there is a lack of timely and accurate foreclosure data; on the other hand, it is hard to write and implement regulations timely enough to deal with a crisis. Dr. Zandi suggests having one regulatory body oversee mortgage lending institutions (including the government sponsored enterprises).
Unfortunately, the effects of increasing rates of delinquency and foreclosure will ripple throughout the economy. Pension fund holders as well as the holders of any securities, equities, and debt could see declines in the values of their portfolios.
After his formal presentation, Dr. Zandi fielded questions. In response to one question, Dr. Zandi noted that the financial system is strong and has helped make this problem less severe than it could be. However, the system might also make it harder to obtain credit, if lenders are less willing to trade in mortgage products.
Dr. Zandi received his PhD at the University of Pennsylvania. He is Chief Economist and co-founder of Moody’s Economy.com, Inc., where he directs the company’s research and consulting activities. Moody’s Economy.com is an independent subsidiary of the Moody’s Corporation and provides economic research and consulting services to businesses, governments and other institutions.
His lunch slideshow and our podcast recording of his talk (Podcast #12) are available online.
Rapporteur: Richard Levy
