by Calculated Risk on 12/04/2005 09:27:00 PM

Barrons opines on housing (pay):

... the accompanying chart ...[with] that single line rising toward the heavens depicts the share of household real-estate assets as a percentage of gross domestic product. It's a graphic (in every sense of the word) description of the fantastic rise of the housing bubble. ... As David warns, "Caveat emptor whenever anything approaches 150% of GDP."

There are ... any number of reasons to be wary. Among them: Affordability is at a 14-year low; the sales of new and existing homes are leveling off or worse, even as prices continue to rise; inventories of unsold homes are more than ample; mortgage applications are running some 20% below the summer's high; and even a few -- make that a very few -- home builders insist that business is as good as it gets, but could get better.

Moreover, the regulators are growing restless, as they inevitably do when denial can no longer serve as adequate policy to cope with a speculative frenzy that's reaching fever pitch. ... the Comptroller of the Currency, the Fed, the FDIC and their kin who oversee the thrifts and the credit unions are busily drawing up drafts of rules they plan to issue before year-end to seriously tighten standards on risky loans.

Not surprisingly, those risky loans ... are those that cheerfully don't require the consumer to pay down principal; for their part, the originators of such loans ... haven't the foggiest real notion as to whether said consumer can afford the house he's buying. Since these exceedingly risky loans are ... "ubiquitous" a crackdown on them could ... "have a significant impact on the housing market, bank-lending activity and the broader economy, beginning in the first half of next year."

What has made the regulators more than a little antsy is that many of the folks taking interest-only or so-called option adjustable-rate mortgages (ARMs in the popular parlance) are due for brutal "payment shock" when the loans reset, as a heap of them are slated to do over the next several years. Resetting, in this instance, means that the suddenly-not-so-happy home owner, besides higher interest rates, will have to start paying down the principal, a double whammy that could raise his monthly mortgage payments by 50%, even 100%.

Since the bulk of option ARMs and interest-only loans are also "stated income" loans, in which the bank cheerfully accepts as income whatever the borrower says it is and no documentation is required, the shock -- and the consequences -- are sure to be that much greater for the borrower. In the circumstances, lenders might begin to feel a bit queasy as well.

Such risky (to put it mildly) loans, ISI reports, may account for nearly half of all the loans made in the past 18 months...