WASHINGTON — Federal Reserve Chairman Alan Greenspan on Monday warned home buyers to be wary of exotic mortgages that allow them to hold down monthly payments or defer principal payments in the early years.
If the red-hot housing market cooled off, Greenspan said, "these borrowers, and the institutions that service them, could be exposed to significant losses."
Greenspan's warning came as sales of previously occupied homes rebounded to a near-record height and their prices reached a new peak, according to a report released Monday.
Although the central bank chief criticized the growing use of "interest only" mortgages and other risky loans that allow buyers to afford expensive homes through lower initial payments, he took comfort from a Fed estimate that most homeowners held mortgages equaling less than 90% of their home's value.
"The vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices," Greenspan said in a speech beamed by satellite from Washington to an American Bankers Assn. convention in Palm Desert.
Mark Zandi, president of Economy.com, said Greenspan had two messages.
"He said housing has turned increasingly speculative, and a correction in the market is coming," Zandi said. "But he also said that the correction won't affect the great bulk of homeowners."
Greenspan's remarks indicated to analysts that the Fed was not through with its campaign of raising interest rates. He suggested frustration that the Fed had raised its benchmark short-term interest rate from 1% to 3.75% over the last 15 months, and yet the average rate on 30-year mortgages had dropped half a point to 5.75%.
"Implicitly," Zandi said, Greenspan is saying, " 'I can keep raising rates, and most homeowners won't suffer.' "
Low interest rates on mortgages, in turn, have lifted home values, prompting a binge of refinancing and home equity loans. Greenspan estimated that homeowners had used about half the proceeds either for personal consumption or for repayment of credit card debt.
One result has been a nose dive in the personal savings rate, to minus 0.6% of disposable income in July.
"So many Americans are consuming by using their home equity," said Alan Skrainka, chief market strategist at investment firm Edward Jones. "If you can't afford a standard mortgage, you probably shouldn't be buying a home."
