- The Washington Times - Wednesday, April 16, 2008


Congress, the Bush administration and presidential candidates from both parties are considering various policies to address economic problems in general and the rapidly evolving crises in the housing and financial markets in particular. To assist policy-makers in making informed decisions, the Congressional Budget Office (CBO) has just released a helpful primer, “Policy Options for the Housing and Financial Markets,” which provides indispensable background data. We found the following observations especially noteworthy:

n The nonfarm private-sector employment decline of 300,000 between November and March “strongly suggests that the economy has entered a recession.” Business fixed investment “appears to have contracted in the first quarter, partly because financing for new projects has become more difficult to obtain.”

n In inflation-adjusted terms, the S&P;/Case-Shiller national housing price index declined nearly 12 percent last year. Based on futures contracts, “market participants expect large additional drops in house prices.”

n The delinquency rate for all subprime mortgages (loans to people with low credit scores and/or poor credit history) increased from 13.3 percent at the end of 2006 to 17.3 percent during the fourth quarter of 2007, while 20 percent of subprime adjustable-rate mortgages (ARMs) were delinquent at the end of last year. In addition to the soaring subprime delinquency rates, “the share of subprime ARMs entering foreclosure more than tripled, increasing from 1.5 percent in 2004 and 2005 to 5.3 percent in the fourth quarter of 2007.” Meanwhile, the delinquency rate on prime ARMs increased more than 60 percent during 2007, rising from 3.4 percent at the end of 2006 to 5.5 percent at the end of 2007.

n From index values close to 100 cents on the dollar a year ago, by late March the values of subprime mortgage-backed securities issued during the second half of 2006 had plunged to 57 cents for those initially rated AAA and to 9 cents for those initially rated BBB. Although $500 billion to $600 billion in mortgages are likely to enter foreclosure over the next two years if there is no bailout, the CBO estimates that “[t]he ultimate losses on those mortgages will be smaller, possibly in the range of $100 billion to $250 billion.”

n Although the Federal Reserve has slashed its short-term target interest rate by 3 percentage points since the summer, the interest rate on the 30-year fixed-rate conforming mortgage, which can be securitized by government-sponsored enterprises (GSEs) like Fannie Mae, has declined only about half a point. Meanwhile, the premium for 30-year fixed-rate jumbo mortgages, rose from from a quarter point to about 2 percentage points since last summer. Moreover, because the interest rates on risk-free medium-term Treasury notes have plunged, the “risk spread” between 30-year rates and Treasurys has widened considerably, especially for jumbos.

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