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Most US homeowners not overstretched: Greenspan

With new evidence that the housing market remained red-hot last month, US Federal Reserve Chairman Alan Greenspan said on Monday that the vast majority of homeowners are not yet stretched too thin.

But Greenspan warned that the use of "exotic" mortgages could be pushing prices higher and inducing some homebuyers to take on too much risk.

Even as he warned about the increasing use of interest-only loans and no-money-down loans, which can become risky if interest rates rise or housing prices fall, Greenspan argued that only about 5 percent of all families have borrowed more than 90 percent of the value of their houses.

"The vast majority of home-owners have a sizable equity cushion with which to absorb a potential decline in house prices," he said.

Greenspan told a banking conference on Monday that speculation in the housing market may have spilled over into the mortgage markets as more and more people use interest-only loans and other techniques to buy homes they might otherwise be unable to afford.

"The dramatic increase in the prevalence of interest-only loans, as well as the introduction of other, more exotic forms of adjustable-rate mortgages, are developments that bear close scrutiny," he said.

Though such loans have appropriate uses, he said, they could also provide a way for marginally qualified buyers to borrow heavily and buy homes at inflated prices.

"In the event of widespread cooling in house prices, these borrowers, and the institutions that service them, could be exposed to significant losses," he said.

Though Greenspan said the vast majority of homeowners were not overextended, his comments on Monday were his sharpest warning yet about the proliferation of new loans that have helped push the household savings to a rate below zero. On Monday, the National Association of Realtors reported that the median sale price of existing homes hit a record US$220,000 last month, up 15.8 percent from one year earlier.

Sales of existing homes climbed 2 percent last month and reached an annual rate of 7.29 million. That was just short of the record 7.35 million, set in June.

Analysts said there were some hints that the hot housing market may be cooling just a bit. The inventory of homes for sale edged up last month, and the amount of time that houses in many cities are sitting on the market is somewhat longer than earlier this year.

But many economists contend that a housing bubble is evident in many parts of the nation, especially around big cities on the East and West coasts, and that housing affordability has declined to an unusually low level even though mortgage interest rates remain at nearly historic lows.

Greenspan's message on Monday was twofold: first, that the use of exotic new mortgages could be aggravating the run-up in prices and inducing some families to take on too much risk; second, that the finances of most households are still on solid ground.

Citing new data collected by the Federal Reserve, Greenspan noted that there was little correlation between states with the biggest increases in prices and states with the highest concentrations of multiple loans, called "piggy back" loans, that allow people to borrow almost the entire purchase price of a home.

Greenspan predicted that savings would climb again when interest rates rise and the housing market cools. Many analysts agree, but caution that spending could slow at the same time.
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