Denial precedes fear.
The Fed and the main street media are in denial that the mortgage credit problem is seeping into primes as demonstrated above. They were in denial for about a month regarding subprimes.
Now the Fed and the main street media story is that the problem is isolated which is a lie.
Bad mortgage debt not widespread problem, Fed official says
Posted 2/20/2007 3:33 PM ET E-mail | Save | Print | Subscribe to stories like this
DURHAM, N.C. (Reuters) — Federal Reserve Board Governor Susan Bies Tuesday said the bulk of the mortgage market was not troubled by bad debt problems, which were concentrated in the subprime, tarnished-credit sector.
"One segment of this market ... is starting to behave in a very problematic way and that is the subprime adjustable rate mortgages," she said in a speech to the Duke University Fuqua School of Business.
"In the aggregate, what I'm talking about is a sliver that is 7 to 8% of all outstanding mortgages," she said.
Mounting debt delinquency and foreclosures in the subprime market, which lends to those with spotty or thin credit histories, as the U.S. housing market cools has been a source of concern for policymakers.
Most subprime mortgages carry adjustable interest rates — known as ARMs — with borrowers facing higher monthly payments as loans reset at higher interest rates.
But Bies' remarks played down the risk that mounting problems in the subprime market was having a broader impact on homeowners, which could have serious implications for spending and growth.
"I don't think there will be a large impact (from subprime market risks) on the prime mortgage industry. On the fringes there may be some. ... I think it's really in the subprime ARM market, it's isolated at this point," she said.
The U.S. central bank expects the economy will expand at a moderate pace this year as inflation comes down, based on its assessment that the chill from the housing market will not spread and the overhang of unsold homes will shrink in time.
"In some locations the inventory adjustment has started, and in other communities it hasn't begun. So this could take us a year, two years, depending on where the location is, in terms of working out the inventory," Bies said.
Residential investment and the auto sector have been the weak spots in an otherwise robust U.S. economy. As their drag fades, growth should pick back up, but the most recent signals from the housing sector have been mixed.
U.S. home building fell sharply last month, bucking a two-month trend of stronger numbers in a sign of weakness that has helped to keep hopes alive for a Fed interest rate cut this year. Fed rates have been on hold at 5.25% since June.
Bies said that demand for housing measured by mortgage applications appeared to have leveled off. But she stressed that there still was a risk for a steeper correction in housing, making it hard for the Fed to assess conditions.
"There's a lot of vacant housing out there right now," Bies said during a question and answer session after her speech. "The potential for inventory correction is still very high."
Even as it watches the housing correction play out, the Fed has made clear it is on watch for any signs that inflation could rekindle in a tight labor market and with factories producing at high levels of capacity.
"We're basically running at full employment," Bies said.
Meanwhile, she said there is little danger that problems with subprime adjustable rate mortgages could spill over into a broader credit squeeze.
"There's a lot of liquidity in financial markets right now," she said.
www.usatoday.com/money/economy/housing/2007-02-20-mortgage-debts-problems_x.htm