Weekend Links

An interesting post with a nice chart and some good discussion over at Calculated Risk where a portion of mortgage equity withdrawal (MEW) is subtracted from the consumer spending component of GDP - the result is underwhelming:

The graph clearly shows the importance of MEW over the last few years.
...
Many observers estimate that MEW will fall significantly in the next few years. If so, this will be a drag on GDP as the growth of personal consumption expenditures slows.

The two most direct impacts of a housing slowdown are:
1) the loss of housing related employment.
2) lower MEW and the impact on personal consumption expenditures.

ooo

This Washington Post article about loan regulations is making its way around all the housing bubble blogs (which, by the way, seem to be growing in number at a quickening pace):

Federal financial regulators appear to be on the verge of reining in one of the most popular mortgages in hot housing markets nationwide -- loans that allow 1 percent to 2 percent payment rates leading to "negative amortization."

In a speech last week to the Consumer Federation of America, Comptroller of the Currency John C. Dugan hinted strongly that banks and their mortgage subsidiaries can expect significantly toughened rules for 2006 governing "payment-option" home loans. Payment-option mortgages have accounted for about a third of all new home loans originated by some major lenders this year. They are especially popular in high-price, high-appreciation markets on the west and east coasts because their low payments permit buyers to purchase costly properties they would otherwise be unable to afford.

Payment-option mortgages typically carry 30-year terms, but allow up to five years of reduced rates as one of several optional payment plans. The other two options allow interest-only monthly payments or fully amortizing payments including principal reduction. About 70 percent of borrowers choose the minimum payment option, according to mortgage securities research.

When a buyer pays the minimum rate, the loan balance increases rather than decreases. A $400,000 original loan balance might balloon into a debt of $440,000, for example. The deferred principal and interest payments get tacked onto the homeowner's total debt on the mortgage, a process known as negative amortization.
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But Dugan warned, "If real estate prices decline -- and there already is evidence of softening in some markets -- these borrowers could face the bleak prospect of loan balances that exceed the value of the underlying properties."
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The bottom line for 2006: Look for tougher standards on popular 1 percent and 2 percent minimum-payment plans, and fewer qualified buyers in high-cost markets where wild appreciation has been sustained in part by reality-bending rate-reduction programs.

The irony of a statement like this will not be fully appreciated until the history books are written, "their low payments permit buyers to purchase costly properties they would otherwise be unable to afford".

Grandparents around the world probably look on with disgust at how long it has taken for someone to start talking about doing something about this sort of thing. Clearly, we are about two years late on talking about lending standards, and we'll see what happens in actually doing some regulating.

Recall that last May's home equity lending guidelines, issued with great fanfare by five federal agencies, have been largely ignored to date.

Isn't is obvious the current strategy to regulating lenders is fundamentally flawed - don't regulate until banks show signs of stress via delinquencies and other measures? A couple years ago, couldn't any of the regulators have thought about what might happen down the road with rapidly rising home prices, buyers eager to take on more risk, and lenders eager to make more loans to facilitate items one and two?

ooo

Alan Abelson at Barron's writes:

The Bushmen evidently are banking on a buoyant economy to offset the increasing disenchantment with the war and a rash of scandals. And that cheery notion draws sustenance from the recent bountiful crop of upbeat economic news, from jobs to durable-goods orders and a pick-up in consumer confidence. But the prospects for the economy, it grieves us to suggest, are not entirely salubrious.

For one thing, the mounting conviction among professional soothsayers that next year will see GDP growing 4% or more is disturbing. For it reflects not a cool assessment of the outlook, but the deadly tendency of that set of seers to forecast by extrapolation -- whatever is, will be. It isn't that the majority of economists are always wrong. But they're much more often wrong than right. So all by itself, their bullishness on '06 makes the contrary view a reasonable bet.

More tangibly, the incorrigible optimists, as is their wont, are blithely ignoring the dark clouds plainly visible on the horizon. The great housing bubble is popping and the consequences are shaping up as dire, indeed. Not only is the value of the happy homeowner's house in jeopardy, but also obviously its ability to finance his free-wheeling spending; the end of the housing boom might even pose a threat to his job. On this score, the Anderson Forecast, conducted under the auspices of UCLA and released last week, bleakly predicts that the decline in housing will run a good several years, in the process reaping a grim toll on jobs -- possibly 500,000 in construction and another 300,000 in the financial sector.

Add to that potential sizable hit to both employment and the consumer's psyche such rather unnerving facts as that Detroit's in the ditch and hellbent on closing plants and handing out pink slips to its workers, whatever color their collars; that the federal government, on the basis of the first two months, seems a lead-pipe cinch to run up a $500 billion-plus budget deficit this fiscal year; that inflation continues to rear its insidious head, and you can see perhaps why we find it difficult to wax enthusiastic about next year's economy.

And let's not, as much as we wish we could, forget about energy. The recent perkier consumer mood and his greater willingness to consume has everything to do with the drop in gasoline prices. But last we looked, crude edged back over $60 a barrel and natural-gas prices shot up to a new all-time high north of $15 per mcf before easing off. Gasoline and heating oil are sure to follow. Sure to follow, too, are furrows and frowns on the consumer's brow and a desolate waning of the brief revival of his spirits.

Last but not least, gold continues to spiral upward, setting still another 24-year high as it closed in on $530 an ounce. Bullion's relentless rise, whatever is supplying the impetus, as we've lately lamented more than once, likely bodes ill for the economy.

While disdain for the 'incorrigible optimists' of the world gets our attention, it is the look of '$530' near the word 'gold' that once again sets us atingle.

ooo

There's not much to this CNN article that we don't already know, but the picture is truly disturbing:

Will the financial markets view Federal Reserve Chairman Alan Greenspan as Santa Claus or the Grinch after the Fed's next policy meeting on Tuesday?

It all depends on whether one simple word is in the statement that the central bank will release following its meeting: "measured."