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S&P Economist More Worried about Rate Rise than Housing Bubble

The concept of a housing bubble is "fundamentally misguided," but an interest-rate-driven rise in mortgage payments might someday be a concern, the chief economist at Standard & Poor's said last week at S&P's structured finance seminar here.

The economist, David Wyss, told attendees at the S&P seminar that market observers should be looking at the size of monthly mortgage payments rather than home prices when sizing up risks to the health of the residential market and the economy.

He said these payments have been "at record lows relative to household income" and, among existing mortgage holders, are only at risk of rising for the one out of eight borrowers who have variable-rate loans.

Mr. Wyss said he believes the residential real estate market is "not going to see a home price collapse," but may see "very slow gains" if interest rates rise. Even at that point, he believes that buying a home will still be cheaper than renting.

Although Mr. Wyss believes the economy is headed toward recovery, he believe its move toward recovery is a very slow one. He said he is "not terribly optimistic" about the stock market and that there are still several concerns in the market ranging from state and local budget deficits in the United States to notable slowdowns in other major global economies, such as Japan and Germany, that could have implications for this country.

There is still "a lot to worry about out there," he said. On the other hand, he said he doesn't believe rates could continue to fall beyond this year.

If rates do stop their downward trend, it will likely bring to an end the record issuance in the market, even in the subprime sector where the refi incentive is supposed to be much different than in the prime sector, said Thomas Zimmerman, an executive director at UBS Warburg, in a separate Wall Street researchers roundtable at the seminar.

Peter DiMartino, managing director at RBS Greenwich Capital, said during the roundtable that the booming issuance in the subprime sector hasn't necessarily indicated, as some suggest, that originators have reached down the credit spectrum in order to compete for volume. He said that, in contrast, credit quality is more likely to be a concern if rates rise, loans become harder to originate and issuance slows, making market participants more desperate for product.

Mr. DiMartino said he believes that in the short term, rates are more likely to decrease than increase, making a 3.25% yield on the rate-indicative 10-year Treasury look more likely than a 4.50%. (The 10-year yield was hovering just above 3.70% at press time mid-day last Wednesday.)

Rod Dubitsky, director, mortgage asset-backed research at Credit Suisse First Boston, said he also believes that rates will be "flat to down slightly" going forward.

Mr. Dubitsky said that the "unusual" combination of low rates and high home price appreciation, in conjunction with an increased use of automated valuation models and automated underwriting, are factors that have allowed issuance volume to expand as companies have been able to underwrite and approve more loans.

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