Congress Acts To Lower Lending Standards
Fitch Ratings tells us that a little known act will throw some gasoline on the fire. "May 2, 2005: Rising rates, an appreciating housing market and the recently passed Jobs Act may set the stage for a large increase in issuance of home equity lines of credit (HELOCs) in the U.S. residential mortgage-backed securities sector, according to Fitch Ratings."
That a ratings agency would shake the pom-poms for yet another lowering of standards tell you a lot about the current environment. "HELOCs were not able to be securitized using a REMIC structure as each additional draw was considered a new loan prior to the passing of the American Jobs Creation Act of 2004, which went into effect Jan. 1 of this year. 'The Jobs Act addresses the revolving nature of a HELOC that allows borrowers to draw on their lines, after the loan has been securitized. HELOCs offer borrowers a cheaper means for home purchases, home improvement, to finance cars or tuition, or to pay off credit card debt.'"
"Fitch has already rated two senior-subordinate HELOC transactions this year from Lehman ABS and Greenpoint Mortgage Funding, with more anticipated throughout 2005."
4 Comments:
I'm starting to get worried that the bubble is going to run for a while yet.
First of all, only a year ago the Fed was worried about deflation. What makes us so sure that they are going to be aggressive with rates to control inflation, expecially now that they've seen the economy is soft ?
Secondly, investors seem to be getting more enthusiastic, not less. If credit gets even more loose, what is stopping even more stupid buying ?
In bubbles, it always goes up fastest just before the collapse. The "sane" people feel like they are getting left out.
"I'm starting to get worried that the bubble is going to run for a while yet."
I wouldn't be too worried about it. With affordability at 5.2% in large parts of CA, the only people left will be speculators and ultimately they will just consume each other.
Keep in mind that 0% rates in Japan didn't stop RE from depreciating 14 years straight there, so it's not unprecedented for a RE bubble to crash despite low rates.
There are MANY things that can puncture this bubble besides higher rates, including instability in the MBS market, and ever-increasing sub-prime lending followed by the inevitable rash of forclosures.
Look for a multitude of new "financial vehicles" designed to make it as easy as possible for the unwary to get sucked into the last vortex of this bubble. Here in Canada our CMHC has just announced a reduction in premiums for mortgage insurance on super-leveraged properties, which will only drive prices higher. There are still a lot of government and finance interests who want to see this bubble keep expanding.
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