Magazine article American Banker

MBA Economist Tries to Counter Bubble Alarms

Magazine article American Banker

MBA Economist Tries to Counter Bubble Alarms

Article excerpt

The Mortgage Bankers Association sent a message Tuesday to mortgage industry participants, regulators, and pundits: Be cautious, but don't panic.

"There are risks, but they're far less dramatic than the hyperbole of recent months," Douglas G. Duncan, the trade group's chief economist, said on a conference call to discuss a research paper it had just released.

The paper and Mr. Duncan's presentation took on the trends most often cited as proof of, and reasons for, a housing bubble, including the rapid rise in prices, the popularity of exotic loan products, and increased investor activity.

Though he agreed that those things all pose dangers, he put special emphasis on market factors that, according to the MBA, reduce risk and are often overlooked in the bubble debate.

The factors include regulatory oversight, economic growth, strong financial markets, well-capitalized banking companies, and the simple fact that everyone involved in the loan process loses when someone defaults, Mr. Duncan said. "We're comfortable that part of the risk management process is acting the way it is supposed to."

The paper said there could be a flurry of refinancing activity as hybrid ARMs reset. It cited an analysis by Deutsche Bank that said over $1 trillion of hybrid loans will hit their first reset date in 2007.

The MBA paid particular attention to innovations in securitization and technology, which, according to the group, have kept the mortgage market strong. Rather than keeping whole loans on their balance sheet, lenders can hold more liquid, diversified securities, potentially with credit guarantees, and risks are spread through the financial markets, the group said. Investors can also "self-select" the risk they want to take on through structured tranches, the paper said.

"Credit risk is no longer just an exposure," the MBA said. "It is a risk that can be actively managed, diversified, mitigated, and controlled through securitization. …

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