Those rising mortgage defaults that you don't really need to worry about

By Lee Russ

Saturday, March 03, 2007 at 05:58 PM

A few weeks ago I posted the item about the rising rate of mortgage defaults n the U.S. Since then, the official economic experts and gurus have been busy pooh-poohing the significance of this phenomenon. But if you read widely and closely, you start to see that the pooh-poohing is mostly for consumption by the unwashed masses.

Stick the denying expert in front of an audience of other experts, and you get:

1. This, from a story about a Ben Bernanke speech before the Stanford Institute for Economic Policy Research:

In response to a question after the speech, Bernanke reiterated that the central bank sees no ``spillover'' from rising delinquencies in subprime mortgages. ``We're obviously going to watch it very carefully,'' he added.

2. This, from the Chicago Tribune:

Home loan rules studied Stricter guidelines may cut default rate ... As more Americans default on home loans, federal regulators and members of Congress are looking to place new restrictions on mortgages for people with shaky credit, a move that could make it harder for many people to buy homes or refinance their mortgages.

Government officials on Friday issued for public comment proposals to address problems that have rattled the mortgage-lending industry and left growing numbers of people in homes they cannot afford.

These measures call on lenders to exercise caution in making such loans and to closely evaluate borrowers' ability to repay them. Other proposals include requiring that such loans be granted only to those who have the ability to make payments for the entire mortgage, rather than just an initial period with a "teaser" rate that later shoots up, typically adding hundreds of dollars to the monthly payment.

Another proposal would ensure that consumers receive enhanced disclosures about their loans, so that fees and rate hikes do not catch them by surprise.

Tell me again why the default rate isn't a problem---but the Fed is going to keep a damn close eye on the rate and its consequences, and the federal government itself is getting involved to see what it can do to calm the default rate down. Nothing like a good fairy tale to get you to sleep so you can start having the bad dreams.