Mortgage meltdown contagion

Mortgage meltdown contagion
A grim forecast has economists more pessimistic over how far the collapse will spread to the rest of the economy.
By Les Christie, CNNMoney.com staff writer
August 10 2007: 1:52 PM EDT


NEW YORK (CNNMoney.com) -- The outlook for the housing market looks even bleaker than it did a week ago. Last Friday we reported that foreclosures were skyrocketing, home prices falling and recovery forecasts were being scaled back.

And now this week, the mortgage meltdown spread to the financial markets with ebola-like speed, sparking fears that tighter credit will have a broader impact on consumers, markets and the economy.

The U.S. government continues to downplay the danger. When the Federal Reserve met this week, the central bank said that inflation is the greatest threat to the economy, not the mortgage crisis.

Yet, Countrywide Financial, the nation's largest mortgage lender by volume, reported Thursday that "unprecedented disruptions" in the mortgage market were forcing it to cut way back on the number of loans it was securitizing and selling in the secondary markets.

In the financial markets, credit, including corporate bonds, has become harder to get. Mark Zandi, chief economist of Moody's Economy.com, had been loath to call it a "credit crunch." Instead, he called it a "liquidity squeeze," that had spread to corporate bond and other financial markets. The difference: In a crunch, nobody can get a loan; in a squeeze, only the riskier borrowers are cut out.

"I think it's still a liquidity squeeze," Zandi now says, "but it has elements of a credit crunch, affecting much of the mortgage market."

It has yet to severely disrupt the prime loan market, however, according to Zandi. The situation will continue until financial institutions revalue their mortgage-backed securities to what they're actually worth.

"They're faced with redemptions and margin calls, and they have to value their securities to their market prices because they have to sell them," said Zandi. That will determine how hard a hit the investment community will take.

Peter Schiff, president of Euro Pacific Capital Inc. and author of "Crash Proof: How to Profit from the Coming Economic Collapse," has said the problem goes way beyond subprime.

"It's a mortgage problem," he said. "Subprime is like a little leak where the underlying problem is the integrity of the dam itself. Most of the mortgages taken out during the past few years will fail."

Schiff expects huge losses in the housing market with home prices falling by half in some areas, which he said has to affect the overall economy. He said he'd been expecting the financial markets to start taking hits long before this week's drop.

"This week is making more sense," he said. "The economy is a basket case."

Most economists are nowhere near as pessimistic. Standard and Poor's chief economist, David Wyss, and Moody's Economy.com's chief economist, Mark Zandi, have forecast 8 percent price drops in the housing market, peak to trough.

Zandi does not believe a consumer spending slowdown is enough to trigger a recession, but he hasn't counted it out. What it will do, he said, is "ensure that the economy grows at a pace below its potential. I wouldn't dismiss the possibility of a recession. I put the possibility at one in five."

Ken Goldstein, an economist for the Conference Board, has said he doesn't believe the subprime contagion is enough to send the economy off-track, and that "the idea that average consumers are quaking over the prospects of losing their homes or much of their equity is wrong."

Your Home: When to cash out

The mortgage market adds up to about $10 trillion, according to Goldstein, with about 10 percent to 15 percent of that in subprime. Of that, some 15 percent or so is imperiled, he said.

"It's big, but not the tipping point that will bring the whole housing market down."

But on Friday Goldstein did concede that "The panic and concern over credit is even spreading across the pond to European markets."

On Friday the European Central Bank (ECB) pumped extra cash into the system for a second day in a row, as a means of calming nervous traders. The ECB added $83 billion in liquidity Friday.

The Federal Reserve followed suit, adding $19 billion in temporary reserves. The move was the biggest single temporary open market operation in four years, the New York Federal Reserve said, according to Reuters.

Subprime problems have not, so far, slowed consumption down much. The pace of consumer spending is still brisk, although growth slowed in June. And the Conference Board reported last week that consumer confidence is at a six-year high. Steady job growth and low unemployment (between 4.4 percent and 4.6 percent since September) have kept it that way.

Consumers don't really care much about changes in housing prices or, for that matter, in the stock market, according to Goldstein.

"If you really want to screw up consumer confidence," he said, "go for the jugular - the labor market."

Schiff, however, said, "What [the optimists] don't realize is that consumer spending has been a function of easy credit and the high housing market. The idea that Americans will keep spending is wrong. With [lower home equity and less access to credit] where're they going to get the money?"

According to Goldstein, though, as long as employment stays strong and workers' earnings grow substantially (4 percent annually, according to him), confidence - and spending - will remain high and the economy will chug along.

"Consumers can continue to stay resilient in the face of lower stock and home prices," he said. "Not only is the economy strong enough to survive the crisis, it's strong enough to quiet it."

Public Invited to Comment on NIOSH Asbestos Research

The National Institute for Occupational Safety and Health (NIOSH) recently issued for public comment a draft research strategy document on asbestos and other mineral fibers. The draft suggests avenues of new research to answer current scientific questions about occupational exposure and toxicity issues relating to asbestos and other mineral fibers; reduce current scientific uncertainties in those areas; and provide a sound scientific foundation for future policy development.

The draft document, “Asbestos and Other Mineral Fibers: A Roadmap for Scientific Research,” is posted on the NIOSH web page at http://www.cdc.gov/niosh/review/public/099/. It was developed by a working group of NIOSH scientists and engineers with combined experience in toxicology, epidemiology, industrial hygiene, analytical chemistry, and other disciplines that are essential for identifying, understanding, and addressing occupational health concerns related to asbestos and other mineral fibers.

While many advances were made in the scientific understanding of occupational health effects from asbestos and other mineral fibers in the mid- and late-20th Century, many questions and areas of scientific uncertainty remain. The draft research roadmap represents a current reappraisal of the areas of research needed to answer those questions and provide a sound scientific foundation for future policy development to prevent asbestos-related occupational illnesses. It also reflects NIOSH’s desire to work with diverse partners in designing, conducting, and supporting collaborative research to fulfill those scientific needs.

“Uncertainty is never desirable when human health is at issue,” said NIOSH Director John Howard, M.D. “By posting the draft roadmap for scientific research, we seek to stimulate a public dialogue that will define the pressing scientific questions about asbestos and other mineral fibers, identify new scientific advancements that may be brought to bear on those questions, and lay out the research most likely to bring certainty out of uncertainty.”

Potential research goals and objectives suggested by the draft document for public comment include:
* Development of improved sampling and analytical methods for asbestos and other mineral fibers;
* Development of information and knowledge on occupational exposures to asbestos and other mineral fibers and fiber-like cleavage fragments, and the health outcomes of those exposures; and
* Development of a broader understanding of the important determinants of toxicity for fibers and fiber-like cleavage fragments.