FDIC Cautions Leveraged Homeowners

The Federal Deposit Insurance Corp. is warning that highly leveraged homeowners with subprime and adjustable-rate mortgages may be stretched too far if interest rates start to rise and local home prices decline.FDIC analysts strongly discount the likelihood of a nationwide plunge in home prices. However, they say they are concerned about the potential for increased delinquencies and defaults in hot housing markets, such as Los Angeles and Denver, where borrowers are resorting to ARMs to make monthly mortgage payments affordable. "Not only do high home prices require more borrowers to seek ARMs, but many of these cities historically have posted some of the widest home price swings," the FDIC Outlook report says. The FDIC report also points out that household debt rose by 11% last year -- the fastest pace since the 1980s. "The amount of household debt is not worrisome in itself, but its concentration among high-risk households may pose additional risk to residential lenders," the report says.