U.S. News

Greenspan Warns Subprime Problems Could Spill Over


Former Federal Reserve Chairman Alan Greenspan said on Thursday there was a risk that rising defaults in subprime mortgage markets could spill over into other economic sectors.

Speaking to the Futures Industry Association, Greenspan conceded that it was "hard to find any such evidence" about spillover from housing yet. But he added: "You can't take 10% out of mortgage originations without some impact."

Greenspan said the downturn in U.S. housing markets appeared to stem more from high housing prices than from a decline in mortgage quality but said he was not downplaying problems in so-called subprime loans.

He said that subprime woes were "not a small issue" and seemed to result primarily from buyers coming into lofty housing markets late after big price run-ups that had left them vulnerable to hikes in adjustable mortgage rates.

Default rates in the subprime segment of the U.S. mortgage market have jumped in recent months as the housing industry slowed and prices fell.

At least 20 lenders in the subprime mortgage sector, which serves borrowers with poor credit histories at high interest rates, have gone out of business as a result.

The crisis has triggered broader concerns that the fallout may spread to mainstream lenders and damage the economy.

Greenspan, whose words still move markets even though he gave up the Fed chairmanship more than a year ago, said that adjustable rate mortgages, or ARMs, have been moving up recently and that has made them a problem for homeowners who are stressed by higher monthly payments.

He also noted the problem would be quickly resolved if the housing sector regained its footing and prices moved up by 10%.

Meantime, though, Greenspan said much of the strength in consumer spending over the past five years can be traced to capital gains on surging housing prices, whether they were both realized or not. That means that if home prices keep falling, there could be more of an impact on the broader economy's momentum, he indicated, since consumer spending fuels two-thirds of national economic activity.