| Page 2 of 2 < |
Greenspan Heightens Warning on Risky Mortgages
Alan Greenspan's congressional testimony this week could be his last as Fed chairman.
(Pablo Martinez Monsivais / Ap)
TOOLBOX
   Resize
COMMENT
 Discussion Policy
 CLOSE
Comments that include profanity or personal attacks or other inappropriate comments or material will be removed from the site. Additionally, entries that are unsigned or contain "signatures" by someone other than the actual author will be removed. Finally, we will take steps to block users who violate any of our posting standards, terms of use or privacy policies or any other policies governing this site. Please review the full rules governing commentaries and discussions. You are fully responsible for the content that you post.
Who's Blogging  |
Those mortgages have surged in popularity over the last year, enabling people to buy houses they could not otherwise afford and helping to further pump up prices, he said. But some borrowers could find it difficult to make their loan payments if interest rates rise sharply or their incomes fall. And if prices flatten or decline, a borrower might be unable to sell a house for enough to pay off such a loan.
Greenspan said such riskier loans account for only a small fraction of all the mortgages outstanding, and therefore do not pose a threat to the overall economy. However, Fed officials see the loans as "the tip of an iceberg we're concerned will get larger," he said.
Such mortgages in "individual cases, could prove disastrous," he said.
Greenspan said it is hard to know whether homes are overvalued on average nationally. But he repeated that he sees "signs of froth in some local markets where home prices seem to have risen to unsustainable levels." And he added that some regional markets appear to be charged "with speculative fervor."
The National Association of Realtors estimates that 23 percent of U.S. homes purchased last year were for investment, and that 13 percent were second homes. Meanwhile, almost one of every four new mortgages are interest-only loans, according to LoanPerformance, a company that tracks loan originations.
Greenspan said long-term interest rates remain low for several reasons, including global capital flows, low inflation and investor expectation that economic stability will continue for many years. He warned financial markets against underestimating the risks involved in some complex investment strategies: "History cautions that long periods of relative stability often engender unrealistic expectations of its permanence and, at times, may lead to financial excess and economic stress."
Greenspan's testimony yesterday and today, when he is scheduled to deliver the identical report to the Senate Banking Committee, could be his last on behalf of the Fed. He has indicated that he intends to step down as chairman when his term expires Jan. 31, after 18 years on the job. However, he could stay on in the position until a successor is confirmed.
White House officials have indicated that they do not plan to nominate a new Fed chairman until early next year, which would leave little time for Senate confirmation before Greenspan's term ends.
"If no successor is in place, Mr. Greenspan will likely remain as chairman after his term on the Board formally expires," economists at UBS Securities LLC wrote yesterday. "That scenario is quite possible."
