Bank on an Improved Economy

Posted: Dec 10, 2007 12:01 AM
Bank on an Improved Economy

WASHINGTON -- It will probably come as a shock to most people, even to those who follow the economy, that mortgage applications rose last month as a result of declining interest rates.

In the midst of the hysterical media-fed notion that a tidal wave of subprime-loan foreclosures was going to plunge the country into a recession, the fact is that the economy is still growing and Americans are still buying homes.

The torrid pace of recent years has slackened, but homes are being sold, banks are lending money and most Americans -- even those saddled with subprime mortgages -- are paying their mortgages on time.

Not everybody realizes this, however. The Washington Post, in a story about the administration's mortgage-relief plan, reported last week that, "Lending, which had boomed for years, ground to a halt." That has been the myth reported ad nauseam on the nightly network news shows, and apparently it has been accepted as a God-given fact.

A few news organizations were trying to counter this fear-fed foofaraw last week. Here's what the Bloomberg financial news service said last Wednesday: "Mortgage applications in the U.S. jumped last week by the most in more than three years," according to the Mortgage Bankers Association, "led by a surge in refinancing as long-term interest rates dropped to two-year lows."

That doesn't sound like the mortgage business has ground to a halt or even slowed to a crawl. The American dream of owning a home still lives, banks are willing to finance that dream and the housing market has not shut down.

Indeed, to put all of this in sharper perspective, the Mortgage Bankers Association reported late last month that 95 percent of all mortgages are being paid on time, and 85 percent of all subprime mortgages are being paid punctually as well.

"America's financial system is secure. Let's focus on helping families in trouble, not on remaking the system in a way that would close doors we've spent decades trying to open," the MBA said in a series of ads it ran to insert some overlooked facts into the debate about the housing markets.

The administration took that sensible advice last week as it put together a voluntary plan to expand what many mortgage lenders are already doing: allowing homeowners with adjustable-rate, subprime mortgages to continue paying an introductory rate for a few more years before the higher-percentage rate kicks in.

This makes sense on the theory that it is better for the lending industry to extend the terms for its paying customers than for the banks to have a mountain of foreclosures on their hands in an unsettled housing market. This is perfectly consistent with the free market where businesses can and do change the terms of their contracts for their own self-preservation and for the benefit of their customers, in response to shifting economic conditions.

President Bush's plan is merely an extension of the housing industry's preliminary, voluntary response in an effort to halt the growing fears wreaking havoc with our financial markets and, potentially, with the economy at large.

The administration harbored political motivations as well. No one wants to head into the 2008 elections with thousands of home foreclosures roiling the economy, which would hand the Democrats a deadly issue to use against the Republicans.

As for the larger economy in all of this subprime-credit turmoil, well, it is still growing, despite forecasts of its decline. U.S. manufacturing expanded last month as a result of increased orders. The Institute for Supply Management, an industry trade group, said its manufacturing index was at 50.8 last month. An index below 50 points suggests contraction.

"Manufacturing continued to grow during November, a trend that is now in its 10th month," ISM reported.

A survey of the Business Roundtable's top corporate executives found that they expected sales, capital investment and job hiring to remain at current levels and even improve over the coming months.

Other signs suggest that the economy is weathering its housing troubles. The Labor Department said that worker productivity continued to rise, thus lowering business unit costs, which should help lower inflation, which should help the Fed to cut interest rates again.

The news on the jobs front was encouraging, too. A report from ADP Employer Services, which tracks hiring, said businesses last month added 189,000 jobs to their payrolls, triple the number forecast by economists.

Meantime, oil prices have fallen, the stock market was sending signals of a year-end rally, U.S. exports were growing at a healthy pace and fixed-mortgage rates were dropping, a sign that homebuyers will begin to come back to the market next year.

The central economic signs, contrary to the doom and gloomers, are fundamentally sound. As financier J.P. Morgan once said, "Anyone who bets against the American economy will lose."