WASHINGTON — After ending 2006 lethargically, the economy is expected to remain sluggish most of this year as businesses and consumers cope with fallout from the painful housing slump.

The broadest barometer of the country’s economic health, gross domestic product, grew at a 2.5 percent annual rate in the final three months of last year, the Commerce Department reported today.

It was a small improvement from the 2.2 percent pace estimated for the fourth quarter and a 2 percent growth rate logged in the third quarter. However, the new reading still marked a lackluster showing that reinforced economists’ predictions for similarly listless activity in the coming quarters.

"I see the economy continuing this well-entrenched, below-trend economic groove that we are in," said Stuart Hoffman, chief economist at PNC Financial Services Group.

According to various projections, GDP growth will remain mediocre, hovering at the 2 percent to 2.5 percent pace in the first half of this year. In contrast, the economy’s average, or trend, growth rate is closer to 3.25 percent, economists said. Gross domestic product measures the value of all goods and services produced in the United States.

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WASHINGTON (MarketWatch) — For the first time in the nation’s history, a significant number of Americans are being threatened with the loss of their home even though they still have a steady, good-paying job.

It’s not just an issue for people with poor credit, those with subprime loans. It also affects people with good enough credit to qualify for a prime loan. Known as Alt-A mortgages, these loans were written for 1 in 5 U.S. mortgages and could have a big impact on the economy and on credit markets — bigger, perhaps, than the effects of the recent shockwaves buffeting the subprime-lender market, economists say.
  
In coming months and years, the credit crunch that’s now squeezing mainly the poor is likely to hit millions of middle-class homeowners who took out risky loans during the great housing boom earlier in the decade. More than 1 million families will lose their homes in the next few years, by one estimate. Another study predicts 2.2 million foreclosures.

This threat is new in American history. Its impact on the economy, and upon the American Dream, is uncertain.
In the past, homeowners have generally lost their home to foreclosure only when they suffered a major life-changing event, such as loss of their job, a major illness or death of a family member. A big jump in foreclosures was unheard of outside a recession that brought high unemployment.

But now, because of the recent popularity of loans geared to let people buy a more expensive home than they can truly afford, all it will take is the passage of time to trigger a default. At some point, all these loans are adjusted to switch from a low, subsidized monthly payment to the full amount required to pay off the loan.

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For months, the steady drip of news about troubles in the subprime mortgage market looked no worse than one would expect: merely a comeuppance for lenders, borrowers and investors who should have known that high-interest loans to people with poor credit were risky.

During the same period, many economists started breathing again after concluding that the superheated home market of recent years had not become the bursting bubble many had feared. While home prices are leveling off, there has been no deep, widespread decline.

But now some experts wonder whether those sighs of relief came too soon, especially in light of the troubles recently experienced by one of the largest subprime players, HSBC Holdings. Some suggest that the growing number of borrower defaults in the "aggressive lending" market, which includes various types of risky mortgages besides subprime loans, could shock the broader housing market and economy after all. Many subprime borrowers are paying 10% to 12%, compared to 6% to 8% on standard, or "prime," loans, and delinquencies are rising.

"There’s no doubt that we have already lost about 1 percentage point of [economic] growth due to the pullback in the housing market," says Wharton real estate professor Susan M. Wachter. A retrenchment after years of soaring home prices fueled by easy money has caused many economists to trim this year’s growth forecasts from 4% to 3%, she adds.

And it could get worse, she warns. If interest rates rise, growing numbers of homeowners could fall behind on aggressive floating-rate loans they took out in recent years, forcing their homes onto the market. The glut would depress prices of homes bought with ordinary "prime" loans as well. With home values flat or falling, owners would no longer be able to use refinancing to convert equity into cash, trimming consumer spending. The current slump in home building and sales would persist. "We could potentially have a housing-led recession," Wachter says. If this does occur, it could begin in the second half of 2007 or sometime in 2008, if interest rates rise.

Others think the U.S. economy could well dodge this bullet. "I’m sort of an optimistic pessimist," says Jack M. Guttentag, emeritus finance professor at Wharton. He expects home prices to fluctuate aimlessly for two to three years without a major decline. But the future is uncertain, he adds, because many of the newer, risky loans have track records only through the recent period of rising home prices. "Rising home prices are an offset to all kinds of trouble," he notes. "They tend to reduce defaults and foreclosures that otherwise would occur, because people who get into trouble find that the best thing they can do is sell their house and walk away with some equity."

Incomplete Risk Data

In a mid-February report titled, "Will the Subprime Meltdown Trigger a Credit Crunch?" Morgan Stanley analyst Richard Berner concludes it will not, describing a credit crunch as a condition in which "lenders deny even creditworthy borrowers access to borrowing." Many firms specializing in subprime loans — offered to borrowers with credit scores below 620 — will go under, he says, but prime lenders’ balance sheets are strong and he expects them to continue making loans and keeping the economy healthy. (Credit scores range from 300 to 850, with scores above 700 generally considered good and those below 600 counted as very high risk.)

While there is debate over how matters will unfold, there is little doubt that changes in mortgage lending have created risks that cannot be gauged precisely. Wachter notes that the heavy use of aggressive loans is so new that data on which lenders and investors base their risk models is incomplete. "There is the potential for model error. The models are untested in a down market."

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There are only two economic reports worth watching this week that are likely to affect mortgage rates. Both of them are scheduled for release the same day, meaning we may see a relatively calm week for mortgage rates. The financial markets are closed tomorrow in observance of the President’s Day Holiday and will reopen Tuesday morning. You may find some lenders to be open for business tomorrow, but I would not expect to see new rates issued until Tuesday.

Wednesday morning brings us all of this week’s relevant news and data. The Labor Department will release January’s Consumer Price Index (CPI) at 8:30 AM ET, which measures inflationary pressures at the very important consumer level of the economy. With exception to maybe the Employment report, the CPI is the most important report that we see each month. Its results can have a huge impact on the financial markets, especially long-term securities such as mortgage-related bonds. It is expected to show a 0.1% increase in the overall index and a 0.2% rise in the more important core data. If we see weaker than expected readings, bond prices should rise and mortgage rates would likely fall.

The second and final relevant economic data of the week is the Leading Economic Indicators (LEI) for January. This Conference Board report attempts to predict economic activity over th e next three to six months. It is expected to show a 0.2% rise, meaning that economic activity may rise in the near future. A smaller than expected increase would be good news for the bond market and mortgage rates.

Also, Wednesday afternoon brings us the release of the minutes from the last FOMC meeting. Traders will be looking for any indication of the Fed’s next move regarding monetary policy. They will be released at 2:00 PM ET, therefore, any reaction will come during afternoon trading.

Overall, the most important day of the week is obviously Wednesday with the release of all of the week’s relevant news. The rest of the week will likely be fairly quiet, keeping mortgage near Wednesday’s afternoon levels. The recent bond rally has me concerned that traders may sell some holdings to capture the profits from the run in prices. We may see some selling ahead of Wednesday’s data while some traders may wait until after Wednesday’s news. I believe that favora ble news is already built into current bond prices. Accordingly, I have shifted to a lock recommendation for immediate and short-term periods.

If I were considering financing/refinancing a home, I would…. Lock if my closing was taking place within 7 days… Lock if my closing was taking place between 8 and 20 days… Float if my closing was taking place between 21 and 60 days… Float if my closing was taking place over 60 days from now… This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

a la mode