Former Federal Reserve Chairman Alan Greenspan said on March 15 that there was a risk that rising defaults in subprime mortgage markets could spill over into other economic sectors.
Speaking to the Futures Industry Association, Greenspan conceded it was "hard to find any such evidence" about spillover from stressed mortgages yet, but added: "You can't take 10 percent out of mortgage origination without some impact."
Greenspan said the downturn in US housing markets appeared to stem more from high housing prices than from a decline in mortgage quality but said he was not downplaying problems in so-called subprime loans.
He said that subprime woes were "not a small issue" and seemed to result primarily from buyers coming into lofty housing markets late after big price run-ups that had left them vulnerable to hikes in adjustable mortgage rates.
Default rates in the subprime segment of the US mortgage market have jumped in recent months as the housing industry slowed and prices fell.
At least 20 lenders in the subprime mortgage sector, which serves borrowers with poor credit histories at high interest rates, have gone out of business as a result.
The crisis has triggered broader concerns that the fallout may spread to mainstream lenders and damage the economy.
Greenspan, whose words still move markets even though he gave up the Fed chairmanship more than a year ago, said that adjustable rate mortgages, or ARMs, have been moving up recently and that has made them a problem for homeowners who are stressed by higher monthly payments.
He also noted the problem would be quickly resolved if the housing sector regained its footing and prices moved up by 10 percent.
Meantime, though, Greenspan said much of the strength in consumer spending over the past five years can be traced to capital gains on surging housing prices, whether they were both realised or not.
That means that if home prices keep falling, there could be more of an impact on the broader economy's momentum, he indicated, since consumer spending fuels two-thirds of national economic activity.
On other issues, Greenspan unleashed a broadside at what he termed "archaic" procedures for settling credit derivative swaps that have burgeoned in popularity.
"I was shocked to find the credit derivatives market, which was working superbly, ends up with the settlement and clearing done with 19th century technology," Greenspan told the futures conference.
"There's an insanity out there that I don't understand," he added. He called on the New York Federal Reserve Bank, which plays a crucial role in the US central bank's financial settlements procedure, to get involved or "we would face a really dangerous problem."
Comments
Comments are closed.