SEPTEMBER 2007: FORUM
What Oregon can expect from the mortgage fallout
THE CURRENT STATE of the mortgage industry should be of great
concern, as it affects the core of the American Dream: home
ownership.
In response to a perceived need to qualify new homeowners in
the face of rising prices, Fannie Mae developed a series of
adjustable rate mortgages to allow lower down payment
requirements and lower “teaser” interest rates,
which would increase as home appreciation occurred. With
that and the current view of the industry, Oregonians can
expect to see three possible outcomes:
Less disposable income: While first-time buyers have
benefited from lower rates, a rate increase of 1% represents
$6.8 billion in annual debt service. Although this is less than
1% of GDP, it competes for disposable income and falls on those
households with higher household debt, less certain income and
net savings. We can expect a combination of higher defaults
from households with less equity and a reduction of consumer
spending from those with more.
Tighter mortgage funding: I believe this to be the biggest
concern. Funding of new mortgages is dependent upon the
attractiveness of mortgage-backed securities to institutional
investors. Also, 18% of subprime debt is held by foreign
investors, whose larger concern may actually be the declining
dollar.
Regulation: Although there is a real need for consistent
regulatory standards, only 45% of mortgages are originated by a
regulated financial institution. The federal Office of Thrift
Supervision recently issued regulatory guidance over
underwriting standards, which I urge all regulatory agencies to
use.
Home ownership is an important public policy and should be
protected and enhanced. The current situation, while not a
crisis, is unique in history and bears watching.
Michael V. Paul
President and CEO
The Commerce Bank of Oregon, Portland
Have an opinion? E-mail feedback@oregonbusiness.com
