NEWS: Mortgage Bankers: Desperate to Lend

BUSINESS WEEK
JUNE 27, 2005

By Peter Coy

Refinancing volume has tumbled, as has profitability, so these lenders offer increasingly sweet deals in a scramble for market share

One of the more puzzling aspects of the current housing boom is that mortgage lenders have been offering ever-sweeter deals on loans. These days it's increasingly easy to qualify for a loan with little or no money down.

The market is rife with interest-only loans, as well as "option ARMs" that allow borrowers to roll part of the interest they owe back into the principal on the mortgage (see BW Online, 6/16/05, "The Mortgage Trap"). It has gotten so bad that you hear anecdotes of some lenders not even requiring proof of income before handing over a million bucks to a homebuyer.

PROFITABILITY SLUMP. Why have lenders been so liberal when they run the risk that many of their marginal customers will go into default? The answer is surprising. Sure, long-term interest rates have at times continued to defy conventional wisdom and decline or hold steady while the Fed hiked short-term rates. This gives lenders a lot of room to keep their rates to customers as low as possible.

But it turns out that's just part of the reason lenders are offering such unbelievable deals to their customers. Many lenders are just plain desperate for business, according to some experts. In a bid for market share, mortgage lenders are offering highly favorable terms to borrowers. That's forcing the rest of the industry to match their terms or lose customers.

The industry's underlying problem is simple: Overcapacity and a drop in profitability from its all-time high of 2003. And that's not the claim of an industry gadfly. It's the analysis of the sector's own top economist, Douglas Duncan, the chief economist of the Mortgage Bankers Assn. Duncan told BusinessWeek on June 23 that profits fell by 70% from 2003 to 2004 among 70 lenders that supply their internal data to the trade group.

GREAT FOR BUILDERS. The Mortgage Bankers Assn.'s profit numbers are not available from any other source because most of the lenders are privately held and are not required to reveal their P&L's to the public. Several of the biggest lenders are publicly held and have performed better than the industry composite.

Many experts credit the availability of cheap loans to a wide swath of the public as one of the factors behind the enormous run-up in housing prices, especially in coastal states. In the U.S., homes' appraised value made up 145% of nominal gross domestic product in March, while stocks and mutual funds were worth 82% of GDP, according to the Federal Reserve.

That's great for homebuilders, who are reporting some of the best profits in years (see BW Online, 6/22/05, "Builders Keep the Home Runs Coming"). But earnings for lenders have fallen off because there's less refinancing than in the peak year of 2003.

OVERCAPACITY CONCERN. Yet in spite of the profit pressures, Duncan told BusinessWeek that he believes lenders on the whole are behaving responsibly. One reason: If lenders resell a mortgage into the secondary market and then the borrower defaults, they can sometimes be forced to buy the loan back, eating the loss. He says he's not worried that the industry is setting itself up for a wave of defaults.

Analyst Paul Miller of the brokerage firm of Friedman Billings Ramsey agrees, saying the big lenders are being prudent and refusing to make loans that would violate their own standards for minimum projected profitability.

Nonetheless, the numbers that Duncan cites show why overcapacity is a concern. The lending business simply doesn't have enough customers to support its current size. In 2003, the industry originated about $3.9 trillion worth of loans, Duncan says. Last year, that figure dropped to some $2.6 trillion because interest rates rose, so although the new home market was hot, fewer people applied to refinance existing mortgages.

That left lenders with "lots of excess capacity," he told BusinessWeek. While lending might go up slightly in 2005, he says, it still won't be anywhere near the 2003 peak.

BILL WITH POOR PROSPECTS. Says analyst Miller: "The industry keeps coming up with cheaper and cheaper products to keep the pipeline full." Even after layoffs, "there are companies that are still too fat," he says. He predicts that some smaller firms will go bust if lending shrinks this year or next.

Congress is considering a proposal that would give the federal government authority over lending practices. Currently the practices are governed by a patchwork of state regulations. The bill before Congress was introduced partly because of worries about foreclosure rates and whether lenders are ensuring that borrowers have adequate resources to repay loans. Most experts don't give the bill much chance of passing.

Still, the next time someone dangles an incredible loan offer in front of your face, you'll have a better idea why.

[MORE]

NEWS: Higher Odds Of Regional Housing Busts

By RUTH SIMON and JAMES R. HAGERTY

Staff Reporters of THE WALL STREET JOURNAL

June 20, 2005; Page A8

A report by Fannie Mae says the probability of housing busts has "risen sharply in certain parts of the country," partly because of looser lending standards.

The report, presented to a group of home builders in Washington last month but not yet released publicly, finds conditions in many parts of the country "mirror past conditions that preceded regional housing busts." Among other things, it cites increases in the number of riskier loans, including ones that allow buyers to delay repaying the principal or that aren't backed by full documentation of the borrower's income and assets.

The report adds, however, that it is impossible to know whether there is a housing "bubble" until after the fact.

The analysis is notable because Fannie and the smaller Freddie Mac are the nation's biggest purchasers of mortgage loans. The two government-sponsored companies buy loans from lenders and package them into securities for sale to investors. They have long played a big role in setting standards for home loans.

Their ability to set standards, however, is eroding rapidly as they lose market share to private-sector rivals. Fannie and Freddie helped finance about 43% of new home mortgages in 2004, down from 59% a year earlier, according to Inside Mortgage Finance, an industry publication. Lenders increasingly are selling loans to rivals with more flexible credit standards. Fannie's capacity to buy loans also has been hampered by its need to shore up capital in the wake of an accounting scandal.

The Fannie analysis shows a loosening of standards for loans included in "private-label" mortgage securities, those that aren't backed by Fannie, Freddie or Ginnie Mae, a government agency that guarantees payments on federally insured loans.

The shifts are particularly notable for home-purchase loans to people with blemished credit records. Nearly 24% of the total value of "subprime" loans included in private label securities last year were adjustable-rate mortgages with an interest-only payment feature. On such loans, borrowers don't need to pay down the principal in the early years. Interest-only mortgages are considered riskier because borrowers don't build up any equity during the interest-only period and face sharply higher payments once they have to start paying back the principal.

Debt loads also are climbing. Mortgage borrowings rose to an average of 91% of the home value last year, from 85% in 2001. If home prices fall, high debt levels make it more likely a house will be worth less than the mortgage balance.

The report found similar shifts among home buyers taking out mortgages larger than the maximum size purchased by Fannie and Freddie, currently $359,650. For instance, the share of "jumbo" mortgages issued with full documentation of the borrowers' income and assets fell to 49% last year from 73% in 2001.

Of course, Fannie could hope to gain by questioning rivals' practices. Asked about that, a spokeswoman said "a chorus" of voices is raising concerns about "the layering of risks." What is more, Fannie and Freddie do buy interest-only loans and mortgages without full documentation.

The report says lending patterns of the past year are similar in some ways to those of the late 1980s, shortly before prices fell in parts of the U.S., including Southern California and New England.

Table: Easier Money
Percentage of subprime home-purchase laons with interest only payments
2001 0%
2002 1.8%
2003 8.2%
2004 23.5%

Percentage of fully documented income and assets for home purchase loans

2001 70.4%
2002 60.9%
2003 57.6%
2004 55.1%

Note: Data are for home purchase loans in mortgage securities not guaranteed by Fannie Mae, Fredie Mac, or Ginnie Mae.

Sources: Fannie Mae, UBS, LoanPerformance

NEWS: Booming Local Housing Market

Weigh Heavily on Overall Sector

By GREG IP

Staff Reporter of THE WALL STREET JOURNAL

June 20, 2005; Page A1

New federal housing data show that the nation's most overheated local housing markets now make up such a large share of the total U.S. market that a sharp fall in their values could stall or slow national economic growth.

The 22 major metropolitan markets with the fastest-growing house prices account for 35% of the value of the nation's residential real estate, but just a fifth of its population, says the Federal Deposit Insurance Corp.

Their share of the national real-estate market has risen quickly. In 2000, the 22 markets accounted for 27% of all U.S. residential real estate. In 1995, the figure was just 24%.

Some economists say local bubbles are less worrisome than a nationwide one because they are more likely to pop individually, in response to local events, reducing the national fallout. And Federal Reserve Chairman Alan Greenspan recently has said that the U.S. has no national housing bubble, but there are "signs of froth in some local markets."

But the latest data suggest that real-estate values in the nation's fastest-growing markets are getting so large that the distinction between them and the national market could become meaningless.

"It's a widespread boom and has macro implications," says Richard Brown, chief economist of the FDIC. "A slowdown would not only hurt these markets, but the U.S. as a whole." (See related article1.)

Says Mark Zandi, chief economist at Economy.com, a consulting firm specializing in regional economic analysis, "If you tote up the metropolitan areas that are bubble-like, it's closing in on half the housing stock. Another year of these price gains and I think it would qualify as a national house price bubble even though not every corner of the country is experiencing speculative activity."

The FDIC considers a local market to be a boom market if it has appreciated 30% or more, adjusted for inflation, in the past three years. It says 55 of the country's 362 local metropolitan markets qualified in 2004. Together, they accounted for roughly 40% of all the value of residential real estate in the country -- up from about 30% in 2000.

The agency has detailed data for only 22 of those 55, though they include most of the largest and among the priciest of those 55 markets. The two largest metropolitan areas, New York and Los Angeles, each have a value of more than $1 trillion. Adding in the Boston, Washington, D.C., and San Diego metropolitan areas, the top five boom markets are valued at $4 trillion, or 24% of the national total, while those markets represent just 12% of the U.S. population of 294 million.

FDIC economists prepared the local estimates at the request of The Wall Street Journal. The FDIC is an independent federal agency that provides insurance for most bank deposits and regulates state-chartered banks that aren't members of the Federal Reserve system.

The disproportionate concentration of housing wealth in a few markets is reminiscent of how a few technology and blue-chip companies drove the bull and bear markets in stocks starting in the late 1990s.

The Standard & Poor's 500-stock index rose 45% from the end of 1997 to February 2000, but the average stock rose just 14%. Over the next three years, as technology companies plummeted, the index fell 36%, but the average stock fell just 2%, according to Aronson+Johnson+Ortiz, a Philadelphia money manager.

At the same time, houses are unlikely to fall anywhere near as sharply as stocks can. That's because it's costly for families to move, and sellers are more likely to take a house off the market if they can't get an acceptable price.

If the 55 boom markets declined 15% while the rest of the country was flat, national housing prices would drop 6% -- on a par, adjusted for inflation, with previous national housing pullbacks, but hardly a crash.

Unlike stocks, the housing market "would be more likely flat with 10% to 20% declines in some regions, or down slightly nationally with some regions looking ugly," says Ethan Harris, chief U.S. economist at Lehman Brothers. Even local housing crashes take years to unfold, he says.

Still, a flat housing market could damp overall economic growth by restraining new construction and consumer spending financed by borrowing against home values. Mr. Harris estimates that if the overheated local markets declined 10% a year for three years, while the rest of the country rose 5% a year, it would reduce U.S. economic growth from 4% to about 2.5%.

Federal Reserve officials expect housing prices eventually to level off and restrain consumer spending. But they believe business investment and exports will increase by then and pick up the slack, maintaining overall growth for the U.S. economy.

Though the U.S. hasn't experienced a serious, nationwide decline in home prices in the past three decades, many local markets have fallen sharply. Prices rose sharply in Southern California in the late 1980s, then collapsed in the early 1990s as the economy reeled from a national recession and deep cuts to defense spending.

"Our economy, especially in Los Angeles County, was devastated," says Michael Bazdarich, senior economist at UCLA Anderson Forecast, an economic research center at the University of California at Los Angeles. The defense cuts alone would have caused a serious local recession, he says. But those cuts along with a reversal in home prices "combined to wreak havoc on the local economy." The damage was amplified by mortgage defaults that brought down the region's largest savings and loan institutions.

Mortgage defaults remain low, but a reversal in home prices could change that. Goldman Sachs mortgage analysts say a delinquent borrower in a rising market can use the equity in his home to qualify for a new loan, but loses that option when prices stagnate or decline.

Goldman Sachs studied the experience of Southern California's Orange County, where subprime mortgages -- those issued to less-creditworthy borrowers -- issued in 1992 defaulted at far above the national average, while subprime mortgages issued in 1999, during the current boom, defaulted far less. They estimate that in a region with strong price appreciation now and a subprime default rate of about 1%, several years of declining prices could push defaults to 8% to 10%.

But analysts say even overheated local markets are unlikely to suffer as much as Southern California did a decade ago. The FDIC's Mr. Brown defines a housing bust as a decline of 15% or more, unadjusted for inflation, over five years. For that to happen, he says, "historically, you need severe local economic conditions." The markets where house prices are appreciating the most "are pretty well diversified economies" that don't depend heavily on a single industry like defense or energy, he says.

However, the FDIC cautions that in the past year, national factors such as low mortgage rates and easier lending standards are displacing local factors in driving home prices, so previous experience may be less useful.

Mr. Zandi of Economy.com adds that local housing collapses in New England and Southern California in the late 1980s and early 1990s "infected the broader banking system." Banks today are better capitalized, and thanks to consolidation, less exposed to any single region, he says. Moreover, banks have "securitized" many of their mortgages -- that is, repackaged them as standalone securities and sold them to investors and to federally chartered companies Fannie Mae and Freddie Mac.

But for the same reason, he warns, "No one really has a grip on who has the risk." If something goes wrong in the mortgage market, a lack of transparency could cause investors to shun good and bad borrowers alike, he says.

The low long-term interest rates of recent years are a key factor tying all local bubbles together in the U.S., says Edward Leamer, chief economist at the UCLA Anderson Forecast. If those rates rise sharply, they will "kill off those bubbles all at the same time."

David Lereah, chief economist at the National Association of Realtors, says a local market becomes most vulnerable to collapse when it experiences rapid price appreciation, rising inventories of unsold homes and a high concentration of lending on loose terms, such as interest-only mortgages.

At present, he says, no market is experiencing a "meaningful" rise in inventories -- in fact, the hottest markets tend to have less inventory than average. He says those markets also tend to have the most limited supply of new housing because of land shortages or regulatory constraints.

Booming northeast and California housing markets dominate national real-estate value

Area (Bolding indicates boom market)	Estimated Value (in billions)	Share of U.S. Market*	Share of U.S. Population
Los Angeles-Long Beach CA PMSA	$1,171.4	6.8%	3.4%
New York NY PMSA	1,145.7	6.6%	3.2%
Boston MA-NH PMSA	720.9	4.2%	2.1%
Chicago IL PMSA	631.9	3.7%	2.9%
Washington DC-MD-VA-WV PMSA	562.4	3.3%	1.8%
Orange County CA PMSA	497.8	2.9%	1.0%
San Diego CA MSA	469.8	2.7%	1.0%
San Francisco CA PMSA	350.1	2.0%	0.6%
Nassau-Suffolk NY PMSA	323.1	1.9%	1.0%
Riverside-San Bernardino CA PMSA	311.4	1.8%	1.3%
Philadelphia PA-NJ PMSA	299.2	1.7%	1.8%
Seattle-Bellevue-Everett WA PMSA	242.5	1.4%	0.9%
Newark NJ PMSA	224.1	1.3%	0.7%
Atlanta GA MSA	214.2	1.2%	1.5%
Minneapolis-St. Paul MN-WI MSA	206.4	1.2%	1.1%
Baltimore MD PMSA	202.5	1.2%	0.9%
Phoenix-Mesa AZ MSA	196.9	1.1%	1.2%
Miami FL PMSA	194.8	1.1%	0.8%
Houston TX PMSA	182.1	1.1%	1.6%
Sacramento CA PMSA	179.3	1.0%	0.6%
Fort Lauderdale FL PMSA	172.8	1.0%	0.6%
Denver CO PMSA	171.2	1.0%	0.8%
Dallas TX PMSA	161.3	0.9%	1.3%
Las Vegas NV-AZ MSA	157.1	0.9%	0.6%
Tampa-St. Petersburg-Clearwater FL MSA	153.5	0.9%	0.9%
Portland - Vancouver OR-WA PMSA	137.4	0.8%	0.7%
New Haven-Bridgeport-Stamford-Danbury-Waterbury CT NECMA	135.1	0.8%	0.6%
St. Louis MO-IL MSA	109.2	0.6%	0.9%
Orlando FL MSA	101.7	0.6%	0.6%
Kansas City MO-KS MSA	90.2	0.5%	0.6%
Pittsburgh PA PMSA	89.1	0.5%	0.8%
Cincinnati OH-KY-IN PMSA	78.7	0.5%	0.6%
Indianapolis IN MSA	67.1	0.4%	0.6%
San Antonio TX MSA	61.4	0.4%	0.6%
Total for Largest Markets	$10,012.4	58.1%	39.5%

PMSA = Primary Metropolitan Statistical Area
MSA = Metropolitan Statistical Area

*Based on median values and number of units method

Source: Federal Deposit Insurance Corp.

REPORT: State of the Nation's Housing 2005

Joint Center for Housing Studies

(Cambridge, MA) In 2004, housing markets posted record growth. Homeownership reached an all time high of 69 percent, with households of all ages, incomes, races and ethnicities joining the home buying boom. Single-family starts hit a record 1.6 million units, while new and existing home sales grew to nearly 8 million. Mortgage product innovations helped markets stay hot. Subprime loans gave millions with blemished credit records, who would previously have been denied a loan, the chance to buy a home. Meanwhile, interest-only and adjustable rate loans are helping blunt the impact of higher home prices. Indeed, adjustable rate mortgages accounted for more than a third of all mortgage loans last year and interest-only loans for nearly one-quarter. “The irony of today’s housing market is that while fundamentals are supporting record levels in residential investments, housing affordability problems are climbing the income

[MORE]

NEWS: The Mortgage Next Door

Business Week:

You've hunted for a new house for months, and now you're ready to bid. But before you do, check one more indicator to see whether you're making a smart purchase: the types of mortgages home buyers in your market are choosing.

If lots of your prospective neighbors are taking out loans with low initial payments but much higher costs down the road, it could mean that they're stretching to buy houses they otherwise couldn't afford. That's a sign of an overpriced market.

The red lights are flashing in San Diego, Atlanta, San Francisco, Denver, and Oakland. Last year, they had the highest share of single-family-home mortgage loans that require just interest payments -- no principal -- in the early years. San Diego led overall with 47.6% of home buyers taking out interest only mortgages, up from 1.9% as recently as 2001.

Providence, Indianapolis, Houston, Pittsburgh, and Milwaukee are at the other extreme, with fewer than 8% of buyers going for interest-only mortgages last year. The data, which appeared first on BusinessWeek Online, were supplied by LoanPerformance, a San Francisco real estate information service. On a national basis, the LoanPerformance numbers closely track those of Fannie Mae Corp. and Freddie Mac Corp., even though those companies buy standard mortgages while LoanPerformance's numbers cover only big-ticket "jumbo" loans and subprime mortgages.

Why are interest-only mortgages a warning sign of a possible bubble? They tend to be most popular in overheated markets, where buyers are looking for every trick to make their monthly payments affordable. Initial payments on an interest-only mortgage are low because borrowers aren't required to pay any principal. But after a period of time -- from 2 to 10 years -- principal payments begin, and the monthly payment jumps by as much as 50%.

Be especially cautious of markets in which option adjustable-rate mortgages are hot. These loans offer borrowers extremely low teaser rates -- typically, just 1% for the first month -- and allow the option of making a minimum payment that may not even cover all of the interest owed for the month. The unpaid interest gets added to the principal, so the total owed can swell like a credit-card bill. Borrowers may be enticed by the introductory rate but unprepared for later payments on the swollen principal. Keith M. Schemm, a mortgage broker in Santa Clara, Calif., says option ARMs are "pretty dangerous loans to do" for many families. "The problem is there's such a frenzy in the marketplace to buy a home."

In assessing a market, also look at whether house prices are high relative to local incomes and relative to rental rates on equivalent properties, and at the health of the local economy. If major employers have recently closed, home prices are likely to head down. But if you're worried about buying at the top of the market, knowing what kind of mortgages your neighbors are choosing should help you make a more informed decision.


By Peter Coy in New York

NEWS: The Mortgage Trap

Business Week:
Lenders are cranking out an ever-growing array of financing schemes and lowering standards to keep the boom going.

Nicki Randolph, a San Francisco real estate agent, hasn't been scared off by talk of a housing bubble. Although she already owns both a home and a condo in Palm Springs, Calif., Randolph just closed on a third property -- dropping more than $1 million on a 1,400-square-foot loft in the heart of San Francisco. How does she juggle so many properties in the overheated California market? Lots of leverage, thanks to banks all too willing to provide ever more. To finance her loft purchase, Randolph took out a mortgage that lets her pay only interest for the first five years -- a tactic that helps her ease into the hefty monthly payments. "Fears that the market is going to crash are way overstated," she says confidently. "It's a seven-mile-by-seven-mile city and a premier place people want to live. You have to be more aggressive here because the prices are so high."

PRESSURE KEEPS BUILDING
Randolph's story is a familiar one -- and it shows the lengths to which buyers are willing to go to snatch up real estate as well as the extremes lenders will stretch to accommodate them. As prices continue to skyrocket in much of the country, banks and lenders are cranking out an ever-growing array of products ranging from no-money-down or interest-only mortgages, to special "Payment Power" loans that allow homeowners to defer monthly payments altogether twice a year. Such creative financing is letting even marginal buyers purchase houses with price tags that used to appeal only to the rich and famous. In the process, banks and mortgage companies appear to be taking on more risk than ever before -- and if rates rise sharply or prices tumble, many of their customers could find themselves in deep trouble, too.

All those innovative mortgage products are a sure sign that lenders are doing everything they can to keep the housing boom going and to capitalize on yet another round of falling interest rates that no one expected. There are plenty of other signs of frenzy as well. Home appraisers complain that mortgage originators are demanding the optimistic appraisals needed to close on loans. "They started warning me to 'be a team player' and to 'hit the number' they needed to seal the deal," says Robert Burnitt, an appraiser in Midlothian, Tex. Enticed by juicy commissions from all those deals, others are jumping into the mortgage biz. Among them are John Switzer, an 18-year-old high school grad from New Bern, N.C., who put off college so he could start work as a mortgage rep for Houston-based Franklin Bank Corp. (FBTX ) "Right now, mortgages are a little more interesting" than college studies, he says.

Yet nothing screams "frenzy" louder than the huge popularity of innovative -- and risky -- mortgage products that allow buyers to stretch for those million-dollar studios and multimillion-dollar suburban colonials. With interest-only mortgages now offered by everyone from ditech.com to Washington Mutual Inc., such loans now account for 20% of all new mortgages, up from under 5% two years ago. Option adjustable-rate mortgages, or "option ARMs," have also become all the rage in superheated markets such as California and Washington, D.C. With an option ARM, borrowers can choose among three different payment plans each month, continually changing what they fork over as their budgets shift. The options: a regular payment of both principal and interest, just the interest, or one that may not even cover the interest -- so the overall balance owed on the mortgage could continue to grow.

The question is, will the proliferation of interest-only and option ARM mortgages leave many buyers strapped down the road, causing higher default rates? David Liu, a mortgage strategist for UBS (UBS ) in New York, notes that after similar products were introduced in the red-hot California market in the late 1980s, they ultimately incurred a default rate that was three times as high as conventional mortgages when the local economy went into recession in the early '90s. Already there are signs that current option ARM borrowers are straining to make their monthly payment: Liu notes that among a bundle of mortgages originated by Washington Mutual and securitized into the secondary market last year, fully 60% of borrowers made only the minimum payment this past March. "That's definitely a sign that people are stretching,"says Liu.

There's plenty of other evidence suggesting that homebuyers and their lenders are climbing out on a limb. According to a survey of homebuyers released last November by the National Association of Realtors, 25% of those polled were able to get a mortgage with no money down, vs. 18% in early 2003 and virtually none in the late 1990s -- a trend that could leave many of these new homeowners under water if home prices take even a small dip. At the same time, lenders are extending far more loans to borrowers who have had credit problems in the past. According to the Mortgage Bankers Assn., the share of new loans made to so-called subprime borrowers -- usually lower-income individuals with spotty credit histories -- rose to 28% in the second half of 2004, a sharp jump from the less than 5% of all lending that subprime represented back in 1994. "I think there are going to be some blowups," says Bert Ely, a bank consultant based in Alexandria, Va. "These are people who are most vulnerable to job loss."

If the housing market swoons and homeowners get into trouble, the mortgage industry won't be far behind, many critics worry. "I'm very nervous about the risk of higher foreclosures down the road," says Stuart A. Feldstein, president of SMR Research Corp., a mortgage research firm in Hackettstown, N.J. And on June 9, Federal Reserve Chairman Alan Greenspan revealed his unease when he warned Congress that "the apparent froth in housing markets may have spilled over into mortgage markets." He noted that the increasing use of interest-only and other "relatively exotic" mortgages are "of particular concern."

SAFEGUARDS
Lenders insist that worries about their standards are overblown. They maintain that, thanks to the advent of automated underwriting during the 1990s, their ability to analyze statistical trends in lending is far better than before, enabling them to better price loans according to risk. "Underwriting is still more of an art than a science, but we're making it far more of a science," says Joe Anderson, a senior managing director at Countrywide Financial Corp. (CFC ), a Calabasas (Calif.) mortgage lender. And lenders note that they've instituted more safeguards since the last housing boom in the 1980s, such as requiring that borrowers have several months of liquid assets to assure that they can keep paying their mortgages in the event of a job loss. "On a scale of 1 to 10 -- with 10 being the worst-case scenario -- my concern level is only around a 2 right now," says D.C. Aiken, senior vice-president for pricing and products at HomeBanc Mortgage Corp. (HMB ), a large lender in Atlanta.

Still, regulators are redoubling their efforts to make sure the banks are right. The Federal Reserve and other bank regulators recently ordered lenders making home-equity loans and lines of credit to do a more in-depth analysis of borrowers' income and debt levels and their ability to repay loans -- instead of relying heavily on credit scores, as many lenders have been doing. And regulators say they're busily drafting similar guidelines for mortgage lending as well. State regulators are also starting to rein in hyper-aggressive lenders. In Illinois, legislators passed a bill that would give a state agency the power to review mortgage applications in lower-income areas to determine whether borrowers should be required to attend loan counseling -- paid for by the loan originator -- before receiving the loan. That, lawmakers figure, will discourage brokers from extending loans to high-risk borrowers who have a high probability of ending up in foreclosure.

Of course, Nicki Randolph and many more like her who have used lenders' aggressive mortgage offers to expand their fledgling real estate empires aren't normally thought of as high-risk borrowers. But if interest rates and housing prices don't follow the rosy script that Randolph and so many others are banking on, a whole lot of homeowners could be caught in a painful trap.


By Dean Foust, with Peter Coy in New York, Sarah Lacy in San Mateo, Rishi Chhatwal in Atlanta, and bureau reports

NEWS: Rise Across the Global Village

The Infinity highlights a remarkable turnaround for a city whose property market went belly up in 1997, and it points to an important facet of this housing boom: It's global and, in some places, more dramatic than in even the most frenzied U.S. markets.

Armed With a 'Saving Glut,'
Investors Chase Returns;
Londoners Buy in Bulgaria

Bangkok Market Is Hot -- Again

By JON E. HILSENRATH and PATRICK BARTA
Staff Reporters of THE WALL STREET JOURNAL
June 16, 2005; Page A1

It was a familiar story from Golden Land Property Development PLC. With its 35-story Sky Villas condominiums nearly sold out, it unveiled plans for an even more lavish project. The Infinity features a replica of Rome's Spanish Steps, a spa in a restored historic mansion and faux-Venetian canals. About 90% of the units in the new development sold out in less than three months, even though some were priced at more than $1 million.

The project isn't in a hot U.S. real-estate market like Las Vegas or Miami. It's in Bangkok, where home prices are soaring, bank mortgage lending is climbing and developers are adding thousands of glitzy units.

Over the past three years, measures of housing values are up 48% in France, 63% in Spain and they've nearly doubled in South Africa, according to data gathered from these markets from sources including the Bank for International Settlements, Economy.com and The Wall Street Journal. In just the past year, prices have risen 19% in Hong Kong and 48% in Bulgaria. They've also boomed in China, Australia and the United Kingdom, though prices are now showing signs of slowing in some markets like Australia and the U.K.

Americans are searching out castles in Umbria. Londoners are gobbling up beachfront property on the shores of Bulgaria. Europeans are finding dream homes on the Indian Ocean near Durban. And in Bangkok, eight years after the city's property market collapsed, Golden Land is seeking buyers from Thailand and abroad with a sales pitch that promises "an environment so opulent, only in your dreams could it be imagined."

"There is a tremendous amount of money floating around looking to invest," says Liakat S. Dhanji, the Nairobi-born chief executive of Golden Land.

Low interest rates -- increasingly moving in sync around the world -- are the clearest engine of this global boom. But there are many other factors tied into the trend, including the increasingly unconstrained flow of capital around the world, aggressive lending by banks here and abroad and a frantic search by investors, large and small, for returns that beat stocks and bonds.

STICKER SHOCK Home-price appreciation for 27 countries over the past year and three years. Rank Country One-Year Change Three-Year Change 1 SOUTH AFRICA * 28% 95% 2 CHINA (Shanghai)* 27% 68% 3 SPAIN * 17% 63% 4 AUSTRALIA * -3% 56% 5 NEW ZEALAND ^ 16% 55% 6 UNITED KINGDOM * 11% 50% 7 FRANCE * 15% 48% 7 IRELAND ^ 13% 42% 9 CANADA * 10% 31% 10 UNITED STATES * 11% 29% 11 THAILAND * 13% 29% 12 SWEDEN * 10% 27% 13 HONG KONG * 19% 27% 14 HUNGARY(Budapest)* 5% 27% 15 FINLAND * 6% 23% 16 EURO AREA * 7% 22% 17 GREECE (Ex-Athens) * 4% 22% 18 KOREA * -2% 20% 19 NORWAY * 10% 17% 20 DENMARK ^ 9% 17% 21 TAIWAN * 10% 15% 22 NETHERLANDS * 5% 11% 23 SWITZERLAND * 1% 8% 24 PORTUGAL * 0% 3% 25 GERMANY * -3% -5% 25 JAPAN * -5% -16% 26 BULGARIA * 48% NA 27 INDONESIA ^ 5% NA *Based on latest available statistics updated through fourth quarter 2004 or first quarter 2005. ^Based on statistics updated between second quarter and third quarter of 2004. Percent changes are calculated using city or national indexes of residential property prices, home prices, existing home prices or prices per square foot. Sources: Bank for International Settlements, Economy.com, CEIC, and Wall Street Journal Research.

The global nature of the boom defies conventional thinking on housing. Economists traditionally say real estate, which can't easily be traded like a stock or oil, is driven by local factors -- like the availability of land in an area or regional employment trends.

"The housing market in the United States is quite heterogeneous, and it does not have the capacity to move excesses easily from one area to another," Federal Reserve Chairman Alan Greenspan told Congress last week. "Instead, we have a collection of only loosely connected local markets."

International Monetary Fund research suggests house-price gains are squeezing affordability in places like Spain, Ireland and the U.K. So far, though, the surging real-estate prices have been concentrated mostly in areas that hold appeal for global investors: large cities tied in to global finance and attractive vacation and retirement destinations.

Most economists still believe a housing slowdown, if it actually comes, would be absorbed by the global economy without much disruption to overall growth rates. Indeed, it is possible the globalization of this boom helps to spread out the risk associated with it.

But if home prices were to fall broadly, it could stress the global financial system, since banks and investors world-wide have been gobbling up mortgages and real estate at increasing rates. It could also undermine the ability of individuals to spend, since so much wealth is now tied up in homes.

While local factors do play a critical role in shaping real-estate values -- prices have risen more in Miami than Memphis and they've fallen in Germany and Japan -- some economists are beginning to concede that global factors can play just as important a role. Researchers first recognized the global pattern in commercial real-estate markets after the office booms and busts that marked the 1970s and 1980s. Now they're seeing it in residential housing, too.

In a study written last year, IMF economist Marco Terrones found 40% of house-price movements around the world were driven by "global factors" that translate across borders, like interest rates and economic growth. "Just as the upswing in house prices has been mostly a global phenomenon," Mr. Terrones argued, "it is likely that any downturn would also be highly synchronized, with corresponding implications for global economic activity."

Prices are already showing signs of slowing or even falling in some places. In Australia, for instance, measures of median home prices rose about 60% during 2002 and 2003, but have fallen slightly in the past year while other measures of home prices have gone flat. In the U.K., the Netherlands and Korea, they also have lost some momentum. In many other parts of the world, regulators are working hard to cool housing fever. Real-estate brokers in China, for instance, have seen signs of a sales slowdown since Chinese authorities imposed a 5.5% tax on properties that are sold within two years of purchase.

"I'm worried about a world recession when this thing finally unravels," says Robert Shiller, a Yale University professor and author of the book "Irrational Exuberance."

Mr. Shiller's own university is an example of how globalization touches a uniquely local asset like real estate. Managers of Yale's $13 billion endowment are increasingly looking outside the U.S. and outside of traditional stock and bond investments to diversify the school's portfolio.

In November, Dean Takahashi, senior director in Yale's investment office, rang the opening bell on the stock exchange in Bucharest. Then he told local reporters the university would be increasing its $20 million of investments in Romania, including some real-estate projects. "We see enormous potential" for foreign investment in residential real-estate projects, says Siminel Andrei, head of NCH Advisors Inc., the administrator of the Romanian unit of New Century Holdings, which manages some investments for Yale outside the U.S.

It is not just the free flow of capital that has globalized the boom. It's also the free flow of people. Doug Platt, a 41-year-old New York executive, counts on outsiders to flock to Italy. He and a group of family and business associates are negotiating for the purchase of a 12th-century castle in Umbria for just over $5 million. Mr. Platt and his partners plan to carve the castle into 20 units and sell them to Londoners looking to hop over to Italy on discount airlines. He says he'll keep one of the units for himself, because he and his Italian wife travel to the region frequently.

"If you are investing in Italy right now, one thing you will hear a lot is that the Italian economy stinks," he says. "But it doesn't really matter to us what is happening in the Italian economy. It's much more important to us what is happening 1,000 miles away in Britain."

While individuals and institutional investors spread bets on real estate, banks are directing more credit to home buyers. In the 12 nations that use the euro, mortgage lending has increased at an 8% annual rate since the end of 2000, according to Bank for International Settlements data. That's faster than the 5% rate of increase for corporate loans. Mortgage lending has grown at an 11% rate in the U.S. and a 6% rate in Japan, while business lending has contracted in both countries. In the U.K., mortgage lending was up at a 20% rate while business lending was up at an 8% rate.

Some reports suggest banks also have become willing to take more chances lending. An April survey of loan officers by the European Central Bank, for instance, found European banks eased lending standards for housing loans during the past four quarters. Citing increased competition from other banks, they reduced margins on mortgages and slightly eased "loan to value" ratio requirements. Surveys of loan officers in places like Poland and Hungary turn up similar results.

"Lenders and investors have to be careful that they exercise proper risk management. If they don't they're going to get burned," says William Rhodes, senior vice chairman of Citigroup. Mr. Rhodes says banks are better managed and better capitalized today than they were in the 1980s and 1990s, when he was helping to navigate debt crises in developing countries. But he's still becoming concerned about a housing bubble.

The disparity between mortgage lending and business lending points to an undercurrent beneath the housing boom. Roughly five years after the 1990s tech bubble burst, business investment is still relatively modest around the world. That contributes to what Ben Bernanke, a Fed governor who has been nominated to serve as chairman of the president's Council of Economic Advisers, calls a "global saving glut" -- a flood of financial assets looking elsewhere for a home. The phenomenon is helping to hold down interest rates and push up housing values.

Other factors contribute to the savings glut, including the growing reserves of Asian central banks. The boom in oil prices also has resulted in huge trade surpluses among oil-producing nations, many of which are recycling their newfound wealth back into the world economy by purchasing bonds and sometimes real estate. Moreover central banks have maintained relatively loose monetary policies in the wake of the 2001 recession and the uncertain recoveries that followed, adding liquidity to the financial system.

As a result, bond yields aren't just low in the U.S.: They are below 5% in Germany, France, Japan, the U.K. and Canada. That makes homes more affordable by reducing monthly mortgage payments. It also drives investors into real estate because the returns they can earn on bonds are so minuscule.

Equities have been a hair-raising alternative. The Dow Jones World Stock Index is down 1% so far this year, up 11% in the past 12 months and down 14% over the past five years.

"I see it on the face of people. They don't know what to do with the money," says Gary Garrabrant, who manages Equity International Properties Ltd., the international portfolio of Sam Zell, the real-estate investor who made his fortune scooping up distressed properties in the U.S. Mr. Garrabrant has been investing in homebuilders in Mexico and Brazil.

Bangkok Bank, Thailand's largest bank, is offering mortgages fixed for the first three years at a 5.25% rate, not much more than the rate on a five-year adjustable-rate mortgage in the U.S. The result: Mortgage lending in Thailand is up more than 20% annually, after contracting sharply in the late 1990s.

A property boom in Thailand would have seemed unthinkable a few years ago. Thai banks were reluctant to lend and the number of developers dropped to fewer than 100 from as many as 4,000 during the 1990s boom. Between 1997 and late 2002, there were no major condominium projects launched in Bangkok and government officials had to press the country's state-owned banks to extend more credit.

Now, there are some 14,000 condominiums in development in a city whose stock of existing units is less than 100,000. The number of single-family homes under construction shot up by nearly 80% over the past two years. Some analysts have started to worry that units in the city's most popular districts are being sold to speculators, who intend to resell them quickly for a profit. Average condo prices in Bangkok's high-end Sukhumvit expatriate district rose 34% in 2003, followed by an 18% gain in 2004.

Fearful of a 1990s repeat, Thailand's central bank has introduced rules that require banks to cap loans for large houses at 70% of the property's value and forced lenders to register major projects with the central bank. Regulators also began speaking publicly of a possible housing bubble. As a result, many analysts predict the country will avert another wrenching bust.

Golden Land Property nearly went belly up during the last downturn. It was rescued by Mr. Dhanji, a Canadian citizen who worked as a real-estate consultant in Hong Kong. Tapping into foreign investors like Morgan Stanley and financier George Soros, he says he raised $100 million and recapitalized the company.

Today, Golden Land has about 2,500 homes in the works or recently completed in Bangkok suburbs and more than 600 residential units planned or recently completed in the central business district. Its crown jewel is the downtown Infinity project. Condominiums will include Jacuzzi tubs with 270-degree views of the city. The company says it has raised prices 12 times since launching the project in mid-March due to high demand. Some 30% of the units are going to foreigners, many of whom see Thailand's luxury developments as a better value than pricy units in places like Shanghai, London or New York.

"There may be a [housing] bubble in the U.S. or Britain," says Gilbert N. Wong, an American executive whose company manufactures household appliances in Asia, but "there's no bubble here." He believes Bangkok is cheap relative to Tokyo or Hong Kong and he thinks incomes are rising so demand will grow. Mr. Wong is spending more than $2 million for two Golden Land units; one is for himself and the other he might use for his children.

Rising rates or a change in sentiment by global real-estate buyers are two main threats to the housing boom. In Bangkok, there aren't signs of serious problem for now. "I think the U.S. is at the top of the cycle," says Mr. Dhanji. But he says Asian real estate, which only began recovering in the past few years, "is just beginning."

---- Cristi Cretzan in Bucharest contributed to this article.

NEWS: The Trillion-Dollar Bet

June 16, 2005

The Trillion-Dollar Bet

By DAVID LEONHARDT and MOTOKO RICH

American homeowners have made a trillion-dollar bet that mortgage rates will remain near record lows for at least a few more years. But with some interest rates already rising, economists worry that the bet could turn bad.

The problem is that new types of mortgages that hold down monthly payments for families - helping many buy homes that they would not otherwise be able to afford - also require potentially far higher payments in future years.

The bill will soon start to come due in a serious way, as the initial period of fixed payments, typically set at artificially low rates, expires for millions of homeowners with adjustable-rate mortgages.

This year, only about $80 billion, or 1 percent, of mortgage debt will switch to an adjustable rate based largely on prevailing interest rates, according to an analysis by Deutsche Bank in New York. Next year, some $300 billion of mortgage debt will be similarly adjusted.

But in 2007, the portion will soar, with $1 trillion of the nation's mortgage debt - or about 12 percent of it - switching to adjustable payments, according to the analysis.

The 2007 adjustments will almost certainly be the largest such turnover that has ever occurred.

The impact is not likely to derail the economy on its own, economists predict, but it will probably slow growth. For individual families, the problems could be significant.

"I'm not sure that people are being counseled on really how big of a risk they are taking," said Amy Crews Cutts, deputy chief economist at Freddie Mac, the mortgage company.

Consider a typical $300,000 interest-only mortgage with fixed payments for the first five years.

The homeowner would start by paying about $1,250 a month. If interest rates rise modestly over the next few years, as many forecasters expect, the payment will jump to almost $2,100 in 2010, according to Stephen Barrett, the owner of Redmond Financial, a mortgage business near Seattle.

With the help of new computer models, lenders have brought out newer and riskier mortgages to attract borrowers and increase their buying power during the long housing boom. The traditional 30-year mortgage with guaranteed payments is increasingly a loan of the past.

The hot loan of 2004 - the interest-only mortgage - allowed home buyers to pay no principal for the first few years of the loan, substantially lowering their initial payments.

It has remained popular this year, accounting for at least 40 percent of purchase loans over $360,000 in areas with fast-rising home prices, like San Diego, Washington, Seattle, Reno, Atlanta and much of Northern California, according to LoanPerformance, a mortgage data firm.

This year's fashionable model, known as an "option ARM," allows borrowers to make payments with monthly rates starting as low as 1.25 percent for the first five years of the loan; the average rate on a 30-year, fixed-rate loan is about 5.6 percent.

During the first quarter of 2005, 40 percent of mortgages over $360,000 issued to people with good credit were option ARM's, said David Liu, a mortgage strategy analyst with UBS in New York. Very few borrowers used option ARM's before 2003.

Many borrowers stand to benefit from these creative loans. On option ARM's, buyers with variable incomes, like the self-employed, can also make smaller or larger payments depending on their take-home pay in a particular month, without incurring penalties. With the average homeowner moving every six years, any loan with lower initial payments can substantially reduce housing costs.

"As a rule, I would prefer the 30-year fixed mortgage," said Alejandro Brown, 31, a technical trainer for Nissan, the automaker, who refinanced the mortgage on his 1,700-square-foot house in Auburn, Wash., with an adjustable-rate loan last year, reducing his monthly payments. But, he said, "I knew I wasn't going to be in my house more than three years; I was very confident."

All of these loans come with the risk of a spike in payments sometime in the future. In particular, borrowers who have taken out an interest-only loan will see a jump in payments simply because they will start to owe principal after the interest-only period lapses. If rates rise, the payments will go even higher.

Borrowers whose incomes have not risen enough or who have not planned for the higher payments could find themselves shocked.

"The apparent froth in housing markets may have spilled over into mortgage markets," Alan Greenspan, the Federal Reserve chairman, said while testifying to Congress last week. "The dramatic increase in the prevalence of interest-only loans, as well as the introduction of other relatively exotic forms of adjustable-rate mortgages, are developments of particular concern."

The lure of such loans is obvious. Because of the lower initial payments, buyers can purchase bigger and more expensive houses.

With her daughter leaving for college this summer, Linda Thompson decided to sell her four-bedroom house in the Seattle suburbs and move to a town house in the city's Lake Union neighborhood. But prices were so high that she had to go beyond her "level of comfort," she said, and spend $619,000.

She signed an interest-only mortgage that cut her monthly payments by about $500 compared with a conventional mortgage. Seven years from now, the bill will rise as she starts paying principal, and the size of the increase will be determined by interest rates at the time. But she may have moved by then, she said. And because the house is in an up-and-coming neighborhood, she expects the value to rise.

"The risk factor - of course it's always there," Ms. Thompson, 49, who runs a small marketing company, said as she was preparing to watch her daughter graduate from high school yesterday. "But to me, real estate is a better investment than the stock market."

"Just sitting there," she said of her new house, "it's appreciating right now."

Still, even some mortgage brokers are concerned by how much their clients are stretching their spending power using creative mortgages.

One possible warning sign is that a growing share of those taking out the aggressive loans is made up of lower-income families living in expensive areas, according to Economy.com, a research company. Another is that variable-rate mortgages have stayed popular even as long-term, fixed rates have gone down and rates on adjustable mortgages have risen.

"There are people who are buying homes that they shouldn't buy," said Eric Appelbaum, president of the Apple Mortgage Corporation in Manhattan. "People are saying, I can afford it on interest-only but I can't afford it" with a traditional mortgage, Mr. Appelbaum said. "It doesn't make any sense."

Since borrowers with interest-only mortgages are not yet paying down their debt, they are hoping to build up equity through an increase in home values. If house prices fall, as they did during the early 90's in some cities, borrowers will be forced to bring money to the table when they sell.

Even if home prices rise a little, borrowers who have taken out option ARM's and made only minimum payments for five years could find themselves in a hole. Such loans, which are typically based on rates that adjust monthly, give homeowners four payment options each month. In the first quarter of 2005, 70 percent of option ARM borrowers made the minimum payment, according to UBS.

In doing so, those borrowers effectively added more debt to the back of their loans.

On a $400,000 loan, for example, a buyer who made only minimum payments over the first five years would add more than $27,000 to the end of the loan, assuming short-term rates increase by one percentage point over the course of the loan, said Robert Binette, a mortgage broker with Hamilton Mortgage in Ridgefield, Conn. The monthly payment would jump from $1,718 in the final month of the fifth year to $2,580 after the loan was reset, a difference of more than 50 percent.

Borrowers who expect to cover the larger debt by refinancing could be in trouble if rates have increased. Thirty-year fixed-mortgage rates are near their lowest level in a generation.

Nationwide, the increase in monthly payments as more mortgage rates start to float will cost families about an extra $40 billion over the next two years, according to estimates by Credit Suisse First Boston. That is the rough equivalent of a 40-cent increase in gas prices over the same span, which would pinch incomes but would not be likely to create a recession.

The biggest concern, many economists say, is that the new mortgages have come onto the market at a time when low interest rates and rapidly rising home prices are the only reality many people can imagine. Families might be making decisions assuming that combination will last forever.

In a speech to bankers in New York, Donald L. Kohn, a Federal Reserve governor, said yesterday that he expected a strong economy over the next few years.

"My message this morning, however, is that this is not a time for complacency," he said.

There is "significant uncertainty," he added, because some recent financial innovations "have not yet been rigorously stress-tested."

NEWS: Regulators May Warn About New Mortgages

Guidance Would Address Use of High-Risk Loans

By Kirstin Downey
Washington Post Staff Writer
Friday, June 17, 2005; D03

Federal banking regulators are preparing to warn lenders about the risks posed by the growing popularity of new kinds of adjustable-rate home mortgages that could leave borrowers facing steeper payments if interest rates rise or facing foreclosure if home values flatten or fall.

The Office of the Comptroller of the Currency, which regulates national banks, is considering a warning called a "guidance," which is a directive to lenders that would specify the kinds of loans and borrowers that would draw regulatory scrutiny because they are riskier. The OCC is reviewing interest-only loans that allow buyers to defer paying off the principal on the loan, as well as "option ARMs," or adjustable-rate mortgages that permit borrowers to decide how much to pay each month but leave them at risk of losing their homes if they do not pay enough.

These loans are proliferating in high-cost housing markets such as Washington, where buyers are using them to keep payments low enough that they can afford homes.

"We've noticed the rapid growth of interest-only loans and the growth of payment-option ARMs, and we thought it was worthy of more study," said Barbara Grunkemeyer, deputy comptroller for credit risk at the OCC. "We're doing our homework at this point to gain a better understanding" of how the loans are performing, she said. "We'll get something out on it, but not before the fall."

Grunkemeyer said the OCC is trying to distinguish where the mortgages are being marketed appropriately and where they are not. She said that the new kinds of mortgages were developed to meet the needs of "high-income, high-net-worth individuals who wanted to pursue other investment opportunities" and that they pose little risk when borrowers have substantial assets.

"The last thing we want to do is to come out with a half-baked guidance that puts a damper on a good product," Grunkemeyer said. She said the OCC is seeking to avoid a "knee-jerk reaction."

But she said the growth of the loans has raised concern because they "introduce new risk by shifting from the bank to the borrower more of the credit risk."

In congressional testimony last week, Federal Reserve Chairman Alan Greenspan said the "dramatic increase" in some of the newer kinds of loans raised "particular concern." Economists and housing experts have warned that some consumers who get these loans could find themselves confronting sharply higher monthly mortgages, leading to home foreclosures, which could become a costly burden to lenders if home values stagnate or drop.

"Our concern is [whether] people really comprehend the exposure they could face down the road when the payments change," said Jef Kinney, Fannie Mae's vice president for business and product development.

Government action could stall the rapid growth of interest-only and option ARM products, which have surged in popularity across the country. In the Washington area, more than a third of home buyers are using interest-only loans, up from about 2 percent five years ago.

Another popular new variant is the option ARM, which allows borrowers to decide how much they want to pay each month above a basic minimum but leaves them at risk of losing their homes if they pay less than the full interest due each month and find their mortgage balance increasing rather than falling. According to UBS AG, an investment banking firm, more than 50 percent of borrowers who took option ARM mortgages in 2004 are making minimum payments. Their mortgage balances are rising each month, which is called "negative amortization."

Regulator restrictions "would probably slow down the explosive growth of the market," said David Liu, a mortgage strategy analyst with UBS in New York. "The trend is very much unsustainable. If the government steps in, it would slow it down."