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
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