Interest Rate Roundup

Monday, April 23, 2007

Some things to ponder ahead of March home sales

This week is a big one for those of us who watch the housing and mortgage markets closely. That's because we'll get March existing home sales tomorrow and March new home sales on Wednesday. Economists polled by Bloomberg are looking for a 4.3% month-on-month decline in used home sales and a 5% rise in new home sales.

Until then, here are a couple of things to ponder ...

* Moody's Investors Service now expects cumulative losses on the 2006 crop of subprime mortgages to be worse than previously forecast. It expects 6% to 8% of loan principal will be lost, up from a previous estimate of 5.5% to 6%. Oops.

* Countrywide Financial CEO Angelo Mozilo is complaining about how regulatory efforts to tighten standards on subprime loans will cause foreclosures to rise. His argument: That forcing lenders to qualify borrowers using fully indexed mortgage rates, not artificially low teaser rates, will prevent lenders from refinancing borrowers out of the high-risk loans they took out in the past couple of years. According to Bloomberg, it's an "inadvertent attack on liquidity exactly when it shouldn't happen."

So let me get this straight: The same mortgage industry that made reckless loans to borrowers with bad credit during the biggest housing bubble in history ... that fought regulators tooth and nail over potentially tightening restrictions in the past couple of years ... that roundly IGNORED the "guidance" issued on high-risk home equity and subprime lending ... and that is now suffering immense losses because of it all ... is complaining about a crackdown. Officials would rather regulators allow them to squeeze even MORE profits out of these hapless borrowers by refinancing them into NEW subprime loans -- thereby artificially propping up asset (home) prices and helping them (lenders, that is) avoid the financial consequences of their inadvisable, past business practices.

My take: The solution to past reckless lending isn't more reckless lending. We have to get back to a place where people can afford homes at sensible prices using sensible financing. We have to let the foreclosure process play out, let the lending industry take its lumps for behaving irresponsibly, and let the market excesses be wrung out. I'll have much more on this topic over time.


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