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Housing Sector Quakes as Fed Chief Hints at More Interest Rate Hikes

By Martin H. Bosworth
ConsumerAffairs.com

June 6, 2006

Mortgage Crisis? Act Now to Avoid Foreclosure • Avoiding Foreclosure Takes More Than Hope --- • Existing Home Sales Jump 10 Percent • Mortgage Delinquencies Still Climbing • Realtors See Signs Of Housing Turnaround • Zillow.com: Fewer 'Underwater' Homeowners In Third Quarter • Distressed Homeowners May Be Able To Rent Their Homes • Should You Walk Away From Your Underwater Mortgage? • Home Prices Rise Four Months In A Row • Consumer Credit Plunges In August • Study: Action By Feds Made Housing Crisis Worse • Mortgage Lender's Collapse Leaves Borrowers Adrift • Bank of America, Wells Fargo Hit With Class Action • Bank Sees Dim Future For Homeowners • Ohio Sues Mortgage Servicer Over Lack Of Modifications --- • More ...

Fed chief Ben Bernanke's hints that more interest rate increases lie ahead have thrown a chill into the housing industry. While discussing the indicators of rising inflation, he speculated that continuing increases in energy prices might "become permanently embedded in core inflation."

"[The Federal Reserve] will be vigilant to ensure that the recent pattern of elevated monthly core inflation readings is not sustained," he said.

Bernanke specifically noted the housing sector as a vulnerable point, citing the cooling levels of sales and new home building, as well as homeowners' increased reliance on home equity in place of actual savings.

"A slowing of the real estate market will likely have the effect of restraining other forms of household spending as well, as homeowners no longer experience increases in the equity value of their homes at the rapid pace seen in recent years," Bernanke said in his remarks to the International Monetary Conference.

Raising the "prime" Federal interest rate would trigger corresponding rate hikes from lenders of all stripes, ranging from home equity lenders to credit card companies.

Many homeowners who have taken out home equity loans or lines of credit, or who used "creative" mortgages to purchase homes, will have tougher times making mortgage payments as their interest rates soar.

David Lereah, chief economist for the National Association of Realtors (NAR), warned Bernanke that "this is a time for the Fed to pause on rate hikes." In comments to the Washington Post, Lereah said that certain "interest-sensitive housing markets that [had] become vulnerable."

The "interest-sensitive" markets Lereah referred to may have been first-time homebuyers, often minority families, who were lured into the market with the promise of cheap interest rates and high home appreciation.

A recent study by the University of Missouri found that adjustable-rate mortgages (ARMS) were often heavily targeted at low-income families, who had the least ability to handle the associated financial risks.

Low-income and minority families are also often penalized with higher interest rates, fees, and penalties in the homebuying process, according to the Center for Responsible Lending.

The Center recently published a study indicating that even among families and individuals with similar credit histories, blacks often receive loans at much higher rates than whites do.

In addition to higher interest rates and predatory loan tactics, many families with low incomes are cutting back on all types of spending due to high gas prices, which will hurt overall consumer spending as strapped homeowners cut back in order to cope with their ballooning mortgages.

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