Tags: Consumer | Confidence | Soaring

Consumer Confidence Soaring

Wednesday, 07 December 2005 12:00 AM

American homeowners and homebuyers don't seem to be noticing, but mortgage bonds are one area in which the bloom may already have fallen off the rose.

According to Bloomberg, U.S. mortgage bonds - described by the news agency as high-risk loans given to risky borrowers - have fallen by 2.5% in the past three months, putting a severe crimp in the $7.6 trillion U.S. mortgage market.

The Federal Reserve is fueling that decline with its continued interest rate hikes, and that could inch some financially troubled homeowners that much closer to default. Bloomberg estimates that the number of high-risk U.S. homeowners could reach 150,000 in 2006.

"We've been hearing about risks of a house price bubble, easy credit and loans to borrowers that really don't qualify, and now in the last couple of months we're starting to see things turn for the worse," Joseph Auth, a bond fund manager at Standish Mellon Asset Management in Boston, tells Bloomberg.

"We don't know if it's going to be a hard or soft landing."

Bloomberg says that mortgage bond declines foreshadow a bursting of the housing bubble, which will hit the masses hard. The news service adds that the decline is a bellwether signaling the end of the housing boom.

Also stoking the fires is the fact that 13.4% of all mortgages tallied after the first half of 2005 were given to high-risk borrowers at a greater risk of default. That's up from 2.4% in 1998, Bloomberg reports, citing numbers from the Mortgage Banking Association.

"The amount of bonds backed by these high-risk loans has more than doubled since 2001, to a record $476 billion, according to the Bond Market Association, a New York-based trade group of more than 200 securities firms," adds Bloomberg.

That is a recipe for disaster, as banks will begin to shy away from making such loans, which could potentially bring the rest of the mortgage market down as well. Bloomberg says the amount of loans made next year may fall by as much as 25%.

"The last time delinquency rates on lower-rated mortgages jumped was in 2000, as economic growth slumped following the Fed's six rate increases," the article says.

"The central bank has lifted rates 12 times since June 2004, to 4% from 1%."

President Bush has spent the last week beating the economic drum, touting recent good news and making sure Americans know that their financial house is presently in good order.

He has a point.

As MoneyNews has noted over the past few days:


Maybe the American people are beginning to wise up as they reach for their wallets this holiday spending season. Perhaps the dire predictions from the left are starting to wilt under the Bush stump assault.

"While the correlation between consumer confidence and consumer spending is less than exact, improving consumer confidence in front of the holiday shopping season is encouraging, given that consumer spending accounts for about two-thirds of all economic activity," says Neil Donahoe, CFP, chief investment officer at SYM Financial Advisors.

More good news on the economic front comes from the Rasmussen Consumer Index, whose latest measurements on consumer confidence show a big leap in the month of November.

The index matched its highest level in nine months on Tuesday, gaining another point to reach 117.7. The index, which measures American consumers' faith in the economy, has illustrated that confidence has been increasing since Labor Day.

According to the ratings agency, 32% of Americans say the U.S. economy is getting better.

"That's up from 25% a month ago and 20% three months ago. In fact, it's the most optimistic assessment since March 9," says Rasmussen in a statement.

It's hard not to mix the economic and the political - especially as the United States enters into the 2006 midterm election campaigns.

Republicans would do well to point out that middle-class Americans - particularly senior citizens - have significantly benefited from two linchpins in the GOP's economic platform: dividends and capital gains.

According to the Washington-based Tax Foundation, the percentage of middle-class Americans who benefit from dividends and capital gains continues to grow.

It's a pocketbook issue that should resonate with millions of voters, says Scott Hodge, president of the organization.

"Because of the graying of America and the trend toward stock ownership by middle-income people," said Hodge, "recent cuts in the tax rates on capital gains and dividends have provided welcome relief to millions of middle-income elderly."

Millions of Americans will be adversely impacted if Congress doesn't.

Hodge says that more than 80% of taxpayers who claim dividend income and 76% who claim capital gains on their tax forms earned less than $100,000 in 2004.

"Older Americans are even more reliant on dividend income than on capital gains," says the Tax Foundation in a press statement. "Among taxpayers aged 65 and 74, a remarkable 51.3% claim dividend income. Among taxpayers above age 75, dividend income is claimed by 50.4%."

As millions of baby boomers reach retirement age, capital gains and dividends could become huge wedge issues, both in 2006 and in the presidential election of 2008. 

These figures indicate a universe of taxpayers in which the leading edge of the "baby boom" generation has just reached its 60th birthday.

"As this generation continues to age, the demographic balance of capital gains and dividend earners will undoubtedly shift even more dramatically up the age scale," the foundation says.


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American homeowners and homebuyers don't seem to be noticing, but mortgage bonds are one area in which the bloom may already have fallen off the rose. According to Bloomberg, U.S. mortgage bonds - described by the news agency as high-risk loans given to risky borrowers -...
Wednesday, 07 December 2005 12:00 AM
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