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Greenspan talks debt

February 12, 2003

Fed chief says household outstandings not worrisome despite cash-out mortgage refinancing

Inman News Features

The unprecedented boom in homeowner cash-out mortgage refinancing will eventually come to an end, but that endpoint isn't yet in sight nor is it fast approaching, according to Federal Reserve Chairman Alan Greenspan, who this morning delivered his quarterly Congressional testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs.

Cash-out refinancing is "bound to contract at some point" when homeowners realize the new interest rate on yet another replacement mortgage wouldn't be significantly more attractive than the current rate on their already-refinanced mortgage. But that contraction might not occur for some time because fixed mortgage interest rates remain "extraordinarily low," applications for refinance loans are "not far off their peaks" and "simply processing the backlog of earlier applications will take some time," Greenspan said.

Home equity borrowing has continued to "trend up" and is to be credited in part for financing continued increases in household spending. Greenspan said household incomes have increased despite soft labor markets due to strong gains in productivity. Higher incomes combined with very low interest rates and lower taxes have permitted "relatively robust" advances in residential construction activity as well as consumer spending.

Mortgage debt is "high by historical norms" relative to household income. But Greenspan doesn't find the higher level of debt worrisome. He said debt servicing relative to disposable income is "well below the high levels of the early 1990s" due to low interest rates and home equity has continued to increase despite cash-out refinancings due to home price appreciation.

He said household debt levels relative to income are "below previous peaks" and "don't appear to be a significant cause for concern at this time," even when other fixed-cost financial obligations like rent, credit-card and car payments are added to mortgage payments.

Housing and home mortgages have been among the few bright spots in the broader U.S. economy that Greenspan indicated has been muddling in along in much the same fashion for some time now, apart from some insignificant quarterly fluctuations. The economy has "largely extended the broad patterns of performance that were evident" this summer, the Fed chief told the Senate committee.

He said the overall economy won't strengthen without a "sustained and broad-based pickup" in capital spending that "almost surely" will require substantial gains in corporate profits. And that's unlikely to happen until the "geopolitical" situation--i.e., the looming war with Iraq--is resolved.

The nation's war footing continues to be a chief economic concern and cause of economic uncertainty. And it's making the Fed's efforts to assess the economy and stimulate economic growth through monetary policy more difficult.

"If these uncertainties diminish considerably in the near term, we should be able to tell far better whether we are dealing with a business sector and an economy poised to grow more rapidly--our more probable expectation--or one that is still laboring under persisting strains and imbalances that have been misidentified as transitory," Greenspan said.

Copyright: Inman News Service

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