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BY ALEKSANDRS ROZENS AP BUSINESS WRITER

NEW YORK —Hear that hiss? That may be the sound of air starting to come out of the housing bubble.

On Thursday, a survey of housing lenders showed that the rate on 30-year mortgages rose above 6 percent for the first time since March. While it’s bounced above that psychologically important threshold a few times in the last year, only to drop back, analysts say this time the momentum looks to be in one direction—higher.

For prospective homebuyers, that means bidding adieu to rates that hadn’t been seen since the president was named Eisenhower and Elvis’ music was hitting airwaves for the first time. And these increased borrowing costs are likely to put a brake on the bidding wars that have stoked astounding housing gains and may even slow consumer spending that has fueled economic growth.

Real estate agents are already reporting a decline in demand.

“It is going to definitely cause more of a slowdown,” said Brenda Binczewski, a real estate broker at Carlson GMAC Real Estate in Palmer, Mass., who said she has seen a drop in business since July and has not had multiple offers for a home in three or four months.

In raising the overnight bank lending rate last month a quarter point to 3.75 percent, Federal Reserve policy-makers expressed their concerns about inflation. And earlier this week, meeting minutes from those Fed officials hinted at more interest rate increases.

These concerns have been noticed in the broader financial markets, especially the U.S. Treasury securities market, where interest rates have risen, tugging mortgage rates with them.

According to Freddie Mac, the U.S. housing agency that sells guarantees for home loans, this week’s 6.03 percent average for 30-year mortgages is the second highest level of the year. Thirty-year rates were at 6.04 percent in the week of March 3.

“The most likely pattern is for mortgage rates to gradually rise over time,” said Frank Nothaft, chief economist at Freddie Mac. He added that “will translate into somewhat weaker demand for housing, lower home sales volume and lower house price growth.”

Douglas Duncan, chief economist at the Mortgage Bankers Association, an industry trade group, said that “because of increased concerns about inflationary pressures, it will stay above 6 percent.”

Low mortgage rates have supported consumer spending on goods and services—which accounts for two-thirds of the nation’s gross domestic product because low borrowing costs allowed homeowners to draw money from properties that had appreciated in value.

Also, the steady rise in the cost of money is sure to limit home price appreciation because buyers won’t be able to as readily bid up prices on homes for sale.

Freddie Mac’s Nothaft pointed out that he does not expect a sharp drop in home prices or home sales because the rise in mortgage rates has been gradual. “It would be different if we had a spike in mortgage rates,” said Nothaft.

Duncan noted that some home buyers may resort to adjustable rate mortgages or ARMs, which initially have lower borrowing costs.

“As fixed rates rise, ARMs will become a bigger factor,” said Stephen LaDue, president of Affiliated Mortgage of Wauwatosa, Wis. “The rate of increase in home values will slow or will start to stagnate,” he said.

But that holds risks down the road for buyers. In its survey, Freddie Mac found that adjustable rate mortgages, which are linked to one-year Treasury rates, were offered at 4.85 percent this week, up from 4.77 percent a week ago and 4.01 percent 12 months ago. Further interest rate increases by the Federal Reserve, which are expected, probably will push ARM rates even higher, analysts said.

At the same time, a few consumers prospecting for properties—especially those prequalified by lenders—may be spurred into action by the rising interest rates.

“People may start buying before it (the mortgage rate) goes up any more,” Binczewksi said. “They would make offers because they have rate locks. Now, with rates increasing, they won’t want to lose rate locks.”

Associated Press writer Martin Crutsinger contributed to this report.

Tuesday, October 11, 2005 By Jeannine Aversa

Copyright © 2005 AP Wire

WASHINGTON —Federal Reserve Chairman Alan Greenspan is turning up the volume on his warnings about the potential perils of certain risky mortgages if the high-flying housing market loses significant altitude.

There are signs some companies are getting the message. A few have begun scaling back some types of those mortgages or making them less appealing by raising costs.

Greenspan mostly is worried about homeowners who took out an interest-only mortgage or option adjustable-rate mortgages to buy property they otherwise could not afford. Borrowers and lenders holding such loans could get clobbered if housing prices drop or interest rates rise.

“In the event of widespread cooling in house prices, these borrowers, and the institutions that service them, could be exposed to significant losses,” Greenspan said recently.

Doug Duncan, chief economist at the Mortgage Bankers Association, said it’s “not only Greenspan, but it is also the market” that is driving some changes.

“If you are going to make a loan, you either have to be able to hold it in your own portfolio or you have to have someone to sell it to,” Duncan said. As some investors demand a higher return for the risk they are taking, some companies may boost loan costs. “If you change the pricing, there’s going to be fewer borrowers for which the loan will be viable,” Duncan said.
Interest-only mortgages require the homeowner to initially pay only the interest on the loan for a set period. Option ARMs gives the homeowner flexibility to decide how much to pay each month. One option is a minimum payment that covers only a portion of the monthly interest.

These mortgages appeal to people who need cash for other expenses. But it also exposes them to far greater risk—if housing prices drop, their loan could be worth more than their property. If interest rates rise, their loan will become expensive to pay off.

The Mortgage Bankers Association estimates interest-only loans accounted for 17 percent of the $1.225 trillion in home loans originated in the second half of 2004, the most recent period for which this information is available. Previously, the association did not break out these types of loans. It does not have figures for option ARMs.

Banking regulators are monitoring the flurry of risky mortgages and plan to issue regulatory guidance to banks.

“Looser underwriting standards and the more widespread penetration of riskier mortgage products have raised questions about how these loans will fare in the event of a rise in interest rates or a softening in house prices,” said John Dugan, comptroller of the currency.

Though there are signs of cooling, home sales still are on pace for a fifth-straight record yearly increase, powered by low interest rates. Meantime, prices have skyrocketed. The average home price soared by 13.43 percent during the 12 months ending June, the biggest gain in more than a quarter-century, according to the Office of Federal Housing Enterprise Oversight.

Greenspan has warned homeowners, lenders and investors they should not count on similar increases. When the housing boom simmers down, prices will not rise nearly as much and could fall in some markets, he said.

Lenders say they lay out to customers the risks and benefits of interest-only and other types of mortgages, and add that customers still have to qualify for the loans.

Greenspan concerned about interest-free loans and other types of riskier mortgages
Monday, October 10, 2005

By JEANNINE AVERSA
AP Economics Writer

WASHINGTON —Federal Reserve Chairman Alan Greenspan is turning up the volume on his warnings about the potential perils of certain risky mortgages if the high-flying housing market loses significant altitude.

There are signs some companies are getting the message. A few have begun scaling back some types of those mortgages or making them less appealing by raising costs.

Greenspan mostly is worried about homeowners who took out an interest-only mortgage or option adjustable-rate mortgages to buy property they otherwise could not afford. Borrowers and lenders holding such loans could get clobbered if housing prices drop or interest rates rise.

“In the event of widespread cooling in house prices, these borrowers, and the institutions that service them, could be exposed to significant losses,” Greenspan said recently.

Doug Duncan, chief economist at the Mortgage Bankers Association, said it’s “not only Greenspan, but it is also the market” that is driving some changes.

“If you are going to make a loan, you either have to be able to hold it in your own portfolio or you have to have someone to sell it to,” Duncan said. As some investors demand a higher return for the risk they are taking, some companies may boost loan costs. “If you change the pricing, there’s going to be fewer borrowers for which the loan will be viable,” Duncan said.

Interest-only mortgages require that the homeowner initially pay only the interest on the loan for a set period. Option ARMs gives the homeowner flexibility to decide how much to pay each month. One of the options is a minimum payment that covers only a portion of the monthly interest.

These mortgages are appealing to people who need cash for other expenses. But it also exposes them to far greater risk—if housing prices drop, their loan could be worth more than their property. If interest rates rise, their loan will become expensive to pay off.

The Mortgage Bankers Association estimates that interest-only loans accounted for 17 percent of the $1.225 trillion in home loans originated in the second half of 2004, the most recent period for which this information is available. Previously, the association did not break out these types of loans.

It does not have figures for option ARMs.

Banking regulators are monitoring the flurry of risky mortgages and plan to issue regulatory guidance to banks.

“The easier availability of first mortgages has helped many marginal borrowers obtain loans and it has helped banks sustain loan volume and profits,” said John Dugan, comptroller of the currency.

“But looser underwriting standards and the more widespread penetration of riskier mortgage products have raised questions about how these loans will fare in the event of a rise in interest rates or a softening in house prices,” Dugan said.

Though there are signs of cooling, home sales still are on pace for a fifth straight record yearly increase, powered by low interest rates. Meantime, prices have skyrocketed.

The average home price soared by 13.43 percent during the 12 months ending June, the biggest gain in more than a quarter-century, according to the Office of Federal Housing Enterprise Oversight.

Nevada had the biggest increase, 28.13 percent, followed by Arizona, 27.82; Hawaii, 25.92; California, 25.16; and Florida, 24.45.

Greenspan has warned homeowners, lenders and investors that they should not count on similar increases. “History has not dealt kindly” with that kind of optimism, he said in August.

When the housing boom simmers down, prices will not rise nearly as much and could fall in some markets, he said.

A lessened appetite for these loans among investors in the secondary mortgage market was a driving factor behind the decision. In the secondary market, loans are purchased from banks and other lenders, pooled together, then sold to investors around the world.

At Wells Fargo, interest-only mortgages so far this year make up about 25 percent of the mortgages it originates. It does not provide option ARMs. There are no plans to trim interest-only loans.

“We’ll monitor the volume. We’ll monitor the credit quality and as long as everything looks good we’ll continue to offer it,” said Greg Gwizdz, executive vice president and retail national sales manager for Wells Fargo Home Mortgage.