The Federal Reserve should "limit" its intervention in the market side of the economy, an expert on the U.S. subprime mortgage market pointed out Friday.
FED'S MOVE ONLY SAVES "RISK TAKERS"
"The Fed should focus on the real economy and should not add liquidity unless there is a real fall in employment or change in inflation," Josh Rosner, managing director at the New York-based independent institutional research firm Graham Fisher & Co., said in an interview with Xinhua.
Otherwise, its actions will "hurt the dollar and, given that we are an importing consumer base, result in increasing inflation," he said.
His remarks came after actions by the U.S. central bank has restored some calm in financial markets.
To ease tightening credit stemming from the troubles in the high-risk subprime mortgage market, which offers loans to people with lower credit and income, the Fed has injected more than 140 billion U.S. dollars into the financial system since Aug. 9.
Also, it approved a half-percentage point cut in its discount rate on loans to banks, a step the Fed claimed to "promote the restoration of orderly conditions in financial markets."
In Rosner's opinion, however, these actions only saved "risk takers."
"Capitalism requires that risk takers be responsible for the outcome of their bets and that one company's poor risk management results in good assets transferring, through sale or bankruptcy, from weak hands to stronger hands," he said.
He argued that "pumping in liquidity forestalls the day when strong firms can compete economically by forcing them to waste good capital competing against firms that are surviving only as a result of Fed created liquidity."
Moreover, he added, the more liquidity the Fed adds, the more it sends investors a message that the problems are large and worth worrying about.
"They will do well to continue to focus on the real economy and not add liquidity until we see changes in employment or inflation, " he stressed.
SUBPRIME PROBLEM WOULD WORSEN
Rosner, who advises regulators and institutional investors on housing and mortgage finance related issues, expects the U.S. subprime problem to become worse.
"As borrowers were able to use creative financing and lower down-payment and income verification requirements, they were able to purchase second homes and investment properties as speculative investments," he said.
While second homes and investment properties historically represented between 6 percent and 9 percent of annual purchases, they have become as much as 35 percent to 40 percent over the recent past, according to the expert.
As home prices stop rising and potentially fall and rates rise, those "investors" become more likely to move their homes "available for sale," said Rosner.
"This will increase already high levels of inventories of properties for sale at a time when foreclosure inventories are already rising, putting further downward pressure on prices," he said.
Meanwhile, as lenders become more wary of defaulting loans and as regulators tighten underwriting standards, there is less available capital for new mortgage origination.
Since the worst underwritten mortgages are of the late 2005 and 2006 vintages and mortgage pools typically season to "peak default rates" over an 18-24 month period, Rosner said, "we will not likely see the worst of the defaults from those vintages until second or third quarter of 2008."
AFFORDABILITY PROBLEMS NEED TO BE ADDRESSED
But Rosner believed that many of the troubled borrowers may be able to be "saved" by providing them temporary loss mitigation. Those borrowers are the ones who would have been able to afford their homes in the first place but may have a temporary setback such as a divorce, job loss or health issue.
"Given some short period of time they could likely become current," he said.
For other borrowers who bought homes they could never have afforded, the longer they are kept in their homes, via loss mitigation, the larger their mortgage obligations become on homes that are falling in prices.
"Those borrowers should either be urged to buy smaller and more affordable homes or move to rental markets," Rosner said.
Given that incomes in the United States have not grown relative to GDP in years and home prices have been rising by pushing newer and lower credit borrowers into home ownership, Rosner further pointed out, affordability problems have increasingly required borrowers to use newer and riskier products with greater leverage to purchase homes.
"The healthiest thing that we could do is to allow home ownership rates and home prices to fall to a natural equilibrium that will address the affordability problems and use more rational and less risky products to purchase homes," he said.
RECESSION MAY LOOM
When asked about how the recent financial market turmoil affects the U.S. economy, Rosner said that he expects "significantly lower GDP in coming quarters."
He mentioned that there used to be the concept of a "cleansing recession" that allowed a resetting of risk management and economic equilibrium.
"Whether desired or not, whether or not we actually end up in a definitional recession, that is what is happening," said Rosner.
"The biggest threat is the overextension of credit and the stagnation of income growth," he said. "This leads to an unsustainable and unhealthy situation for both the funding nation and the borrowing nation."
Source: Xinhua
|
Comment
Tell A Friend
Print Format
Save Article