By Steve Kerch, CBS.MarketWatch.com
Last Update: 12:03 AM ET April 16, 2002

CHICAGO (CBS.MW) -- The last five years have been the best of times for the mortgage business, an ideal credit market in which millions of buyers could qualify for loans and millions more homeowners could refinance debt at 40-year low rates.

But there may be flip side to the remarkable run of putting more people in homes and piling more debt upon their houses. It may not result in the worst of times in the coming years, but the fact is no one in the mortgage industry is really sure how much trouble lies ahead.

"Any time you have a situation where people buy things at the top of the market and are highly leveraged, the potential for problems is there," said Ronald Rosenfeld, president of Ginnie Mae, the secondary market agency for government-insured FHA and VA mortgages.

"But we do have policies in place that can get us over the bumps in the road. It's not of great concern to us," he said.

Small stumbling blocks

In fact, few of the leaders of the secondary market agencies who spoke at a recent Mortgage Bankers Association of America conference in Chicago were overly concerned about the prospects of thousands of newfound American homeowners finding themselves in foreclosure in the coming years.

"The information on delinquencies is mixed, though overall they are relatively stable," said Nicholas Retsinas, director of the Joint Center for Housing Studies at Harvard University.

But they did agree that some loan holders will run into trouble.

"Mortgage delinquencies are going to go up, even if the economy stays totally robust," said Paul Peterson, executive vice president in Freddie Mac's (FRE: news, chart, profile) single-family business. "The question is what level are they going to go up to?"

Peterson said the pattern for mortgage delinquencies has been constant for at least 30 years: Very few loans default in the first year, then the delinquency rate rises steadily before peaking in years four and five.

"People have their act together when they get a mortgage. But then they can suffer an illness, a divorce, a job loss -- things they didn't anticipate," he said. "But what really is a problem is when they put on a lot of consumer debt after (getting a new mortgage)."

There are two wild cards in the current cycle: Recently developed mortgage products that have helped put borrowers into houses who once might not have qualified for loans and the unprecedented refinancing boom of 2000 to 2001 that turned the delinquency-pattern clock back on millions of mortgages.

While innovative mortgage products directed mostly at low-and moderate-income buyers have made more Americans homeowners than at any time in history, the mortgages do not have much of a track record, and thus, make it hard to base delinquency projections.

Riskier borrowers get loans

"The subprime market has developed in the best credit environment we've ever had. And we don't have a lot of data to go on beyond the three to four years that has been taking place," Peterson said. "We have no data on how those loans will perform under stress."

And while the refinance boom has been a boon to most homeowners, some may not have been financially wise with their proceeds.

About 60 percent of those who refinanced Freddie Mac loans in 2001 took cash out of their houses in the transaction, "which is huge compared to any other time period," Peterson said.

"Tax law changes incent people to put as much debt on their home as possible, so they are probably paying off a lot of other high-cost credit with this money. I'm not sure I'd be too concerned about it."

But Peterson also points out lower interest rates have created a wealth effect for those who refinanced loans in 2001, adding $10 billion to their bottom line.

And rising home prices have added to that wealth effect, and made it possible for homeowners to grab money from the appreciated value of their houses and still hold mortgages with a smaller debt-to-value ratio, on average.

"In fact, the current loan-to-value ratio in our portfolio is just about as low as it's ever been (at 60 percent, meaning owners have 40 percent equity on average) and we're pretty comfortable with that," Peterson said.

No qualms about borrowing

There also has been a generational shift, said Jamie Gorelick, vice chairman of Fannie Mae.

Younger homeowners are acting much more quickly than their parents would have to tap into their home's equity for a variety of purchases or to get them through a period of financial difficulty.

Fannie Mae is exploring ways to offer customized mortgage products that will make it easier for people to utilize their house value, she said.

"There is a change occurring in which the house has become a financial asset and a financial asset management tool for the family," Rosenfeld said.

Or as Retsinas put it: "Houses have become personal ATM machines," he said.

That's not necessarily a bad thing, even if there is some inherent risk in it.

"As a society we've made a big bet on housing and it's been a terrific bet. And as a consequence we've had more robust communities because of it," Gorelick said.
Steve Kerch is the real estate editor of CBS.MarketWatch.com in Chicago.

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