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COMMENTARY: DÉJÀ VU ALL OVER AGAIN By Mark Lieberman, Chief Economist for the Five Star Institute In the spring and early summer, more lenders, as surveyed by the Federal Reserve, said they were easing standards for mortgage loans than were tightening. In the spring and earlier summer, the median price of an existing-single family home was increasing by an average of 1.8 percent per month as sales increased about 0.5 percent per month. Personal income, according to the Bureau of Economic Analysis, was increasing at about 0.5 percent per month. In the spring and early summer, the CaseShiller Home Price Index was increasing by an average of 1.5 percent per month. In the spring and earlier summer, the nation added about 230,000 jobs per month. About one quarter to one half of them was in retail or leisure and hospitality, the two lowest-wage industry sectors tracked by the Bureau of Labor Statistics. That was 2005, the year before the housing bubble bust brought the economy down with it. In 2013, the numbers look eerily similar: According to the latest Federal Reserve Senior Loan Officer Survey, an average of 4.6 percent of lenders surveyed acknowledged easing lending standards for prime residential loans and 16 percent of lenders surveyed reported an increase in demand for loans to subprime borrowers. So far this year, the median price of an existing-home has increased an average of 2.5 percent per month and sales are increasing an average of 1.4 percent per month. The Case-Shiller index has increased an average 1.3 percent per month. Of the average monthly increase of 192,000 jobs per month, jobs in retail or in leisure and hospitality have accounted for nearly one-third. While some of the 2013 numbers look better than 2005, other coincidental indicators are reason for concern. In 2005, sales at furniture stores and building and garden supply stores—retailers who thrive when homes are purchased—increased an aver- 24 age of 0.3 percent and 0.4 percent, respectively. In 2013, those stores experienced average monthly increases of 0.2 percent and 0.4 percent, respectively. Sales at appliance stores, however went from an average monthly growth rate of 0.8 percent to an average monthly contraction of 0.1 percent. The falloff at furniture and appliance stores suggests homeowners may be stretched to make monthly mortgage payments—even in an era, until recently, of low mortgage rates—rates that will only increase when the Federal Open Market Committee begins to tighten monetary policy. And, according to a newly published paper, monthly payments are critical in forecasting defaults. Economists Andreas Fuster of the Federal Reserve Bank of New York and Paul S. Willen of the Federal Reserve Bank of Boston studied the effect of payment size versus reducing principal in loan modifications, but their conclusions are equally applicable to new mortgages. "Little is known about the importance of mortgage payment size for default," they wrote. In their study of workouts, the Fed economists said "interest rate reductions dramatically affect repayment behavior, even for borrowers who are significantly underwater on their mortgages," adding "our estimates imply that cutting a borrower's payment in half reduces his hazard of becoming delinquent by about 55 percent." Fuster and Willen didn't directly study new loans, but the parallel approach is to determine what borrowers have left over for discretionary purchases, which offers a reason for concern as the housing sector struggles to recover. The impact of housing on the rest of the economy—construction jobs and suppliers as well as the financial sector—is, to be sure, a reason to look to housing as a stimulus but not if, as the numbers suggest, history is perhaps repeating itself. Catch Mark Lieberman's commentary every Friday on P.O.T.U.S. (Sirius-XM 124) at 6:20 a.m. (EDT). BORROWERS IMPROVING THEIR CHANCES OF GETTING QUALIFIED Tight lending standards may be keeping some prospective homeowners out of the market, but according to LendingTree, consumers overall are increasing their likelihood of getting approved for a home loan with higher credit scores and lower loan-to-value (LTV) ratios. During the last year, the average credit score for prospective borrowers rose by more than 10 points, LendingTree revealed in a Q2 borrower health report. At the same time, average LTVs improved, falling 1.6 percent. From the first to second quarter of this year, the online lender found average credit scores increased in 41 states, while average LTVs decreased in 43. "It is encouraging to see a shift towards more responsible borrowing. Higher credit scores and improved LTVs are a sign that borrowers are working to improve their financial health," said Doug Lebda, LendingTree founder and CEO. "As the housing market bounces back, credit is becoming more accessible, making it easier for consumers to qualify for mortgages," Lebda continued. "But consumers still need to monitor their credit scores and understand their financial situations when looking to purchase a home in order to qualify for the lowest rates and maintain long-term financial health." STAT INSIGHT 987 Individuals facing professional liability lawsuits in connection with 122 failed banks insured by the FDIC. Source: FDIC

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