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Mortgage Madness • More on Mortgages • Regs

Mortgage Madness: Sub-prime borrowers face hard times.
More on Mortgages: Expect a flap in Congress over bank practices.
Regs: Revised ADA standards will be issued this July.

Mortgage Madness
Expect the mortgage mess to get worse. Delinquency and foreclosure rates on loans are likely to keep climbing through the year, and probably won’t retreat much in 2008.

But talk of a crisis is way overblown.
The problem is limited to one segment: Subprime borrowers ... those with weak credit who took a risk on adjustable rate mortgages. At most, subprime ARMs are 7% of the market, and not all of them will end up in default.
Plus buyers aren’t fleeing the market. Mortgage demand, adjusted for seasonal swings, is up 10% since it bottomed out in August. It’s a good sign for the spring selling season.
And the economy is still adding jobs. History shows that the worst housing slumps are closely linked to downturns in employment.

Even so, homes will sell for less, with median prices dropping 4%-5% this year and total home sales falling about 8.5%. Housing starts will decline by about 18%.
That’s a correction, not a crash, though it may seem like one to builders who saw median new-home prices rise 9% as recently as 2005.
We don’t see a broad credit crunch coming. Most major banks are sufficiently diversified and regulated to weather their exposure to the subprime sector. There’s also no evidence that mortgage lenders will choose to pull away from the bulk of borrowers in the prime market.

But the ongoing wave of bad mortgage news will bruise confidence. Consumers and firms won’t spend as much, especially in the first half.
And the next earnings season will raise anxieties as many banks and others take big write-offs to offset hits in the subprime market. Note that General Motors is spending $1 billion to cover exposure from its former finance unit.
Investors should focus on underlying trends in financial results, not these onetime items.

We continue to set slim odds for a recession. Consumer spending isn’t in jeopardy. Subprimes affect mostly lower-income workers, who account for just a small portion of overall spending.

But we are cutting our economic growth forecast:
2.5% for 2007, with the first half closer to 2%.

More on Mortgages
Politicians in Washington will pounce on the mortgage problems,
with at least a few Democrats grilling Bush-appointed regulators
about perceived lapses in their supervision of subprime lenders.
Expect lawmakers from lower-income areas to raise the most fuss,
since their districts and states are going to bear the brunt of the pain.
But there’s little Congress can or will do. Additional oversight
might frighten lenders away, preventing too many lower-income workers
from being able to get the mortgages they need to become homeowners.
Calls for aid to strapped mortgage payers will hit roadblocks.
Figuring out who was duped and who knowingly took too big a risk
is close to impossible. And there’s little money available for a bailout.

Stiffer lending regs are coming, but they’ll be behind the curve of what mortgage lenders have done in recent months to tighten lending.
Financial regulators are likely to gain broader powers,
allowing them to monitor currently unsupervised mortgage originators.
The most effective help would be an interest rate reduction by the Federal Reserve. Such a move would trigger downward adjustments
in payments on variable rate mortgages, which track short-term rates.
But the Fed isn’t budging. Inflation is still too high. The February numbers show the core rate of inflation, which excludes food and energy, up 2.7% over 12 months. Fed officials want it no higher than 2.5% and preferably closer to 2%. Rate cuts just aren’t an option.

Regs
Get ready for another bevy of rules on access for the disabled.
New buildings and renovations will have to meet revised standards being issued in July under the 1990 Americans with Disabilities Act.
Among them: Lower light switches, bigger bathroom stalls, more reserved parking, modified service counters, and more entrances for the disabled. One proposal has business groups especially upset. It would require wider aisles within work areas, not just for entryways.
Existing buildings probably won’t be affected by the July regulations.

Federal regulators are going after the municipal bond market.
Look for tighter disclosure and accounting rules by year end from the Securities and Exchange Comm. They’re in reaction to abuses in the $2.3-trillion muni bond market used by local government officials to raise money for new roads, schools, sewers and other public works.
The rules will mean higher borrowing costs for cities and towns.
They’ll face more paperwork and have to be more open about their debts
and more careful how they invest money from bonds before spending it.
Investors, though, will face less risk of default on the bonds.