Greenspan warns of ARMs danger

June 10, 2005

Liberal mortgages fuel chance of price decline, Fed chief says

Inman News

Federal Reserve Chairman Alan Greenspan warned Thursday that new, liberal kinds of mortgages are helping to drive up home prices and fueling the danger of a sharp price decline, media reports said.

Greenspan said low-interest-rate mortgages also are contributing to "froth in some local markets," when speaking before the Joint Economic Committee in Washington, D.C., according to reports.

The Fed's chief said he continues to be bewildered by the decline in mortgage rates and other long-term interest rates even as the Fed is beginning the second year of its campaign to raise short-term rates, reports said.

Overall, though, Greenspan told the congressional committee that the economy is on "firm ground," in line with the remarks he had prepared for the meeting.

"You can't get around the fact that this is the most extraordinarily successful economy in history," he said, according to reports.

The chair of the Fed acknowledged some concern about the housing sector, which he said is overheating in some markets, the L.A. Times reported. The National Association of Realtors estimated Wednesday that sales of existing homes would reach 7 million this year, topping last year's record of 6.78 million.

Greenspan said second homes bought for investment or vacation purposes can be sold quickly because the owners do not live in them, and they account for much of the acceleration in home sales, according to reports.

So does the dramatic increase in interest-only loans -- in which the borrower does not begin paying off the principal for several years -- and "relatively exotic forms of adjustable-rate mortgages," Greenspan said, according to reports.

Sen. Jack Reed (D-R.I.) took issue with some of Greenspan's comments about overall economic conditions, the L.A. Times reported.

"I am concerned about what continues to be a disappointing economic recovery for the typical American worker," Reed said, expressing concern that wages are stagnant even as corporate profits are soaring, and with energy and health costs rising, that is "squeezing the take-home pay of workers," the Times reported.

Greenspan replied, "there is no question that this standard of living is unmatched, and it's unmatched for everybody. Everybody has got a car, and the cars that people have today are so superior to what they were 50 years ago it's unimaginable," accounts said.

Copyright 2005 Inman News

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