- The Washington Times - Friday, October 5, 2007

Back in March, former Federal Reserve Chairman Alan Greenspan suggested that the United States might be heading for a recession by the end of the year. My column explored reasons why he may be right.

I cited my mortgage company’s loan volume as one reason. In 2003, my small company originated more than 1,200 loans, most of them refinancing loans that put additional liquidity in the borrower’s pocket, either through a lower interest rate or cashing out with a larger mortgage.

In 2006, my company’s volume was a fraction of that in 2003. Most refinancing loans were for the purpose of fixing adjustable rate loans before the reset period, often resulting in a higher rate.

The influx of liquidity to American homeowners was turned off. My point was that folks will begin to feel less wealthy and reduce their spending, hurting the overall economy.

Well, a lot has happened in the last six months and it appears Mr. Greenspan’s forecast might be correct. Indeed, we may be headed for a recession. Consult any business news Web site. The picture isn’t pretty.

The Fed recently lowered short-term interest rates in order to stave off a recession, and it is likely to continue on the same path with more cuts, but the question is whether the Fed’s actions will be too late.

Consider:

• While “A” credit mortgage financing is still widely available, the subprime mortgage debacle has spread into a significant credit crunch. Easy financing is no more.

• Unsold homes on the market for sale is at an 18-year high.

• Home prices in 15 of 20 major cities have fallen for the 12th straight month. Prices in 10 major cities are falling at the fastest pace in 16 years.

m Consumer confidence recently fell to a 21-month low, citing worries about job growth and economic uncertainty.

While my prediction that the rise in mortgage rates in 2004 is a contributing factor to a slowing economy may be wrong, it’s pretty clear that there are a lot of other pressures that could adversely affect the economy.

Most economists think that the current state of the economy is likely to get worse before it gets better. I agree. If this happens, inflation is not likely to be a threat. The Fed will continue to lower short-term rates, and the market forces that control long-term rates, including mortgage rates, will eventually follow the Fed’s actions.

Lower mortgage rates will make housing more affordable, and existing homeowners can save some money by refinancing.

Remind me to read this column again in three months.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail (henrysavage@ pmcmortgage.com).

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