- The Washington Times - Thursday, March 15, 2007

Former Federal Reserve Chairman Alan Greenspan yesterday said he expects the fallout from growing mortgage defaults to spread to other parts of the economy.

“You can’t take 10 percent out of mortgage originations without some impact,” he told the Futures Industry Association in Boca Raton, Fla., referring to the shutdown of dozens of mortgage companies that had offered loans to people with shaky credit and high debt ratios. Housing executives say that has dimmed the outlook for home sales.

“One must assume a fairly substantial drop in subprime-mortgage originations” has occurred as a result of the bankruptcies and the wider withdrawal of mortgage credit for marginal borrowers by banks and brokers, Mr. Greenspan said.

“It is not a small issue,” he said, adding that the woes of subprime lenders have been tied to the flattening and fall of home prices in the last year. “If we could wave a wand and prices go up 10 percent, the subprime-mortgage problem would disappear” because delinquent borrowers would be able to get out of their obligations by refinancing or selling their homes.

House prices have dropped in the Washington area and other cities where they doubled or tripled between 2000 and 2005, but the median national price as measured by the government has not declined. Mr. Greenspan said the most devastating economic impact would be from a broad, nationwide fall in house prices.

“If prices go down, we will have problems — problems in the sense of spillover to other areas,” he said, particularly consumer spending, which fuels about 70 percent of economic activity. He said much of the strength in consumer spending over the past five years can be traced to capital gains from surging house prices, which created a kind of “wealth effect” that encouraged consumers to spend more and save less.

Given the important role that home appreciation has played, it’s “quite remarkable that we have not seen an impact on personal consumption” as yet, he said.

Mr. Greenspan’s assessment of the housing and economic outlook has changed dramatically in the past two weeks. As recently as March 7, he said the housing market looked like it had bottomed. But the sudden withdrawal of exotic, risky financing by lenders in recent weeks has darkened the outlook for home sales and the broader economy just as the spring and summer high season for selling homes begins.

Mr. Greenspan helped spark a stock sell-off worldwide two weeks ago by asserting that the chance of recession has grown to one in three. He did not repeat his recession forecast yesterday, and his remarks had only a transient effect in trading on the New York Stock Exchange, where many traders already fear a deep economic impact from the widening mortgage-credit crunch.

Toll Brothers Inc. Chief Executive Officer Robert Toll added to the market’s fears yesterday by saying that the start of the spring selling season was “pretty much a bust” and he couldn’t predict when the housing recovery will begin.

A few areas experienced a revival as the spring season opened, including New York, San Francisco and Los Angeles, he said, but every other region had a poor showing.

Mr. Toll, a luxury-home builder, said the “prime selling season” starts the weekend after the National Football League’s Super Bowl and Presidents Day weekend and continues fairly strong until Passover and Easter, when it fades and then picks up again in July. The high season coincides with the period when families with children must move to avoid disruption in their school schedules.

“When will the market rebound? Who knows? ‘The Shadow’ knows. I have no idea,” Mr. Toll said at a conference in Las Vegas.

Pulte Homes Inc. Chief Financial Officer Roger Cregg also said yesterday that he doesn’t see a quick revival in housing.

“We’re not projecting anything to bounce off the bottom at this point,” he said at a UBS conference in London. “A lot of buyers have moved to the sidelines.”

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