FMC Analysis Warns Of `The Overheated Mortgage Machine`
WASHINGTON (Dow Jones)--The rapid growth in mortgage debt and the broad distribution of "agency" securities across the financial system has exposed banks and other financial intermediaries, including the government-sponsored enterprises themselves, to considerable risk in the event that interest rates rise and/or housing prices fall.
Or so warns the Financial Markets Center, an independent, nonprofit research entity, in a new analysis. Agency securities, in bond market parlance, prominently include those issued by the housing-related GSEs - Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System.
"In addition to their own mortgage loans, banks hold 16.6% ($890 billion) of outstanding agency issues, while thrift institutions and credit unions own another 4.9% ($264.8 billion)," the FMC said in an analysis entitled "The Overheated Mortgage Machine."
"Private pension funds and public-employee retirement funds have 7.9% ($425.4 billion) of these securities and mutual funds hold 13.4% ($718.4 billion)," the FMC said.
"Unlike these institutional investors, households do not own substantial volumes of agency paper outright," the analysis continued. "However, households are indirectly exposed to the GSEs' fortunes through the holdings of their pension and mutual funds. If rising interest rates triggered a decline in the value of agency securities, household net worth would diminish as a result of these holdings."
The analysis said the third quarter surge in residential lending by banks "reflects a steady transformation of deposit-taking institutions into a housing-finance colossus that supports - and is supported by - the quasi-governmental institutions (GSEs), which channel savings into mortgages."
It said this transformation has compounded imbalances within credit markets by flooding homebuilders and homeowners with borrowed cash while sectors such as manufacturing go betting for funds.
The analysis said home equity borrowing is a poor substitute for increased profits, investment, employment and disposable income, and that consumption spending financed by excessive debt accumulation isn't a path to sustainable recover.
"The bursting of a mortgage bubble could unleash broader financial disruptions with deeper macroeconomic implications than the shakeout following the S&L crisis of the 1980s," the analysis warned. |
