Global: Pondering Delphi

[Stephen Roach, the Morgan-Stanley analyst who warned of an Economic Armageddon this winter, is weighing in on Delphi. He has found the correct issue. More than $600 billion in pension funds may be at stake and it’s not likely that these dominoes can be stopped. There’s another $1.5 trillion of state and local pensions that are at risk. This is not just the pensions of Delphi and GM workers we’re talking about. It’s the pension of billions of schoolteachers, police officers and government workers whose pension funds are deep in GM and Delphi stock through mutual funds.

Mr. Roach is quite correct when he says that waiting for the shoe to drop is difficult. But he, like FTW, is more certain now that we should expect a shoe warehouse to be opening over our heads in a very short time. There are just no positive signs that the US economy can take any more really huge hits and the government remains as insolvent and incorrigible as ever. – MCR]

[“This would certainly have been the year for global investors to have avoided dollar-denominated assets.”

You can't avoid oil, and oil is still denominated in dollars - even when it is denominated in euros. Because euros quite simply can NOT be a substitute reserve currency. Not unless the Europeans are willing and able (in that uniquely American way) of running outrageous national debts that they can offset with a printing press. They cannot. They will not.

“While the dollar itself has held up surprisingly well, US stocks and bonds have not.”

The power of treasuries is not in their return but their inescapable extortion value. No one can sell dollars short without wiping out their own central bank reserve values. This is exactly why - although people have been saying for years that chickens will come home to roost - the chickens have stayed far afield. These dark predictions are being made based on an inaccurate model of global finance - the same one that obsessively watches stock markets - which are speculative activity against which the transnational ruling class is utterly insulated. The house never loses.

“The single most important question for global asset allocation is whether this year’s under-performance of dollar-based assets is just an anomaly, or the beginning of a multiyear trend. For what it’s worth, I suspect it’s the latter.”

The dollar will fall, but as an intentional policy of the US to export its own deflation. The cost-benefit analysis done by Europe, China, and others will determine that accepting this slap is still better than calling in Uncle Sam's markers. The trick in this system - which is definitely unsustainable - is that the abuser and the multiple abused are tied together like a Gordian knot. If the US economy crashes due to a catastrophic devaluation of the dollar, whom will the rest of the world sell to? That's precisely why these other nations continue to make loans to the US that they know damn well will never be repaid... and which finance a war designed to set them all up for future extortions.

“America’s massive external deficit of 6.4% of GDP in the first half of 2005 -- on track to account for 70% of all the world’s deficits this year -- seems set to go from bad to worse over the next year, as the US saving shortfall is exacerbated by energy-related pressures on households and Katrina-related pressures on the Federal government. And the US consumption share remains at a record 71% of GDP, well in excess of shares in Europe (58%), Japan (55%), and China (42%).”

Here's where the shoe will drop - in the 'burbs, when there is no place left to shift the losses outside the US, and the middle class has their pensions and economic security liquidated to cover the losses from yet another fictional-value asset bubble.

“When saving-short America needs funding, it turns to the rest of the world to provide the capital. Global lenders have been delighted to so -- and, so far, have offered the flows at extremely generous financing terms insofar as the dollar and real interest rates are concerned.”

“I do not want to blow the Delphi bankruptcy out of proportion. But unlike the failures of WorldCom and Enron that were traceable to accounting scandals, Delphi’s Chapter 11 filing reflects the pressures of global competition, bloated labor costs, and the enormous legacy costs of increasingly onerous retirement benefits.”

This is pure blame-the-victim bullshit... to be expected from Wall Street, even its dissenters.

“The first phase of restructuring is usually dominated by plant closings, outsourcing, and net job destruction -- a distinct negative for personal income generation and consumption. In the second phase, the balance shifts toward renewal, expansion, and net job creation -- conditions that foster a healing of consumer confidence and income generation, which eventually sets the stage for a pickup in private consumption.”

Fairy tale. No one can show a shred of evidence, using global statistics, that anything except the first phase is characteristic of neoliberalism.

“After a decade of restructuring, Japan may well be on the cusp of entering the healing phase. In Germany, corporate restructuring remains in the painful first phase -- although the gap between job reductions and creation has been narrowing this year. That’s usually a good leading indicator of a shift to the healing phase.”

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Delphi’s bankruptcy is a big deal. It is emblematic of a new set of pressures bearing down on the US. The global rebalancing framework that I continue to embrace suggests that the world’s growth and asset return dynamic has only just begun a major tilt away from the US and dollar-based assets. If that’s the case, America will have little to offer in a low-return world for risk-averse and yield-hungry investors. Could Delphi be the long awaited wake-up call that drives this realization home?

Hindsight is always a great luxury. This would certainly have been the year for global investors to have avoided dollar-denominated assets. While the dollar itself has held up surprisingly well, US stocks and bonds have not. Year to date, the S&P 500 is down 1.3% versus a 9.5% increase for the All-Country World ex US Index (in US dollars). Returns in Japan, Europe, and most emerging markets have been terrific. Despite all the euphoria over sustained upside earnings surprises in the US, equity returns have been hammered by a wrenching compression of multiples. US sovereign bonds have also underperformed most of their global counterparts; year-to-date returns of 1.7% on 10-year Treasuries have fallen far short of above 9% returns for German bunds and emerging market debt. Only Japanese government bonds have lagged those in the US -- hardly surprising in light of the nascent recovery in the Japanese economy.

The single most important question for global asset allocation is whether this year’s under-performance of dollar-based assets is just an anomaly, or the beginning of a multiyear trend. For what it’s worth, I suspect it’s the latter. The metrics I continue to use suggest that there has been only scant progress on the road to global rebalancing. The disparity between the world’s current account surpluses and deficits continues to widen, likely to hit a record of nearly 5% of world GDP in 2006. America’s massive external deficit of 6.4% of GDP in the first half of 2005 -- on track to account for 70% of all the world’s deficits this year -- seems set to go from bad to worse over the next year, as the US saving shortfall is exacerbated by energy-related pressures on households and Katrina-related pressures on the Federal government. And the US consumption share remains at a record 71% of GDP, well in excess of shares in Europe (58%), Japan (55%), and China (42%). The world may have woken up to the imperatives of rebalancing. So far, however, there is very little to show in the morning after.

The good news is that the laggards of the world are on the mend. Restructuring and reforms are leading the way in the surplus-saving economies of Japan and Europe. Yet it is very different in America. Suffering its greatest shortfall of domestic saving in modern history -- a net national saving rate that has averaged just 1.5% of GDP since early 2002 -- the US lacks the internal wherewithal to support investment in public goods such as infrastructure, homeland security, and a safety net for the underclass (see my 9 September 2005 dispatch, “The Shoestring Economy”). When saving-short America needs funding, it turns to the rest of the world to provide the capital. Global lenders have been delighted to so -- and, so far, have offered the flows at extremely generous financing terms insofar as the dollar and real interest rates are concerned.

The Delphi Chapter 11 filing needs to be seen in this context. It is yet another contingent liability for the shoestring economy. First of all, this is a major bankruptcy in the US, in and of itself -- the 13th largest in terms of assets and the largest auto-related filing in history. But the real twist comes in the form of potential spillover effects to GM. As part of the 1999 spin-off, GM agreed to guarantee pensions, post-retirement healthcare, and life insurance for certain Delphi UAW workers -- guarantees that our fixed income team believe amount to around $3.8 billion (see Monica Keany and Swee Lim, “Delphi Corp: What Will It Recover?” September 30, 2005). For a nation that long boasted, “What’s good for GM is good for America,” this is hardly a development to take lightly.

The Delphi bankruptcy raises two key questions -- the first about credit spreads. Liquidity-driven markets remain more that willing to treat Delphi as largely an idiosyncratic risk that does not pose broader credit problems for Corporate America. GM ripple effects may well draw that presumption into question -- especially for credit markets, where spreads remain historically tight. A second concern pertains to the funding of legacy costs. This is a big deal for the US. Dick Berner tells me that the Pension Benefit Guaranty Corporation puts the funding gap at $450 billion for single-employer plans and another $150 billion for multi-employer plans -- to say nothing of approximately $1.5 trillion for state and local government plans. Like all contingent liabilities, America and its creditors have long viewed this as a distant obligation. Delphi challenges that complacency, as do recent bankruptcy filings for Delta and Northwest Airlines. That, in turn, raises the risks of added fiscal funding strains on the US government. For saving-short America, those risks will only increase an already daunting current-account financing problem.

I do not want to blow the Delphi bankruptcy out of proportion. But unlike the failures of WorldCom and Enron that were traceable to accounting scandals, Delphi’s Chapter 11 filing reflects the pressures of global competition, bloated labor costs, and the enormous legacy costs of increasingly onerous retirement benefits. In that important respect, Delphi’s failure could well be yet another important milestone on the road to US restructuring -- especially insofar as its impacts on American workers are concerned. But there’s an important twist in 2005: America has long stood alone in embracing the “creative destruction” of corporate restructuring. The US penchant for shredding social contracts and forcing bad companies out of business is widely viewed as a unique aspect of “flexibility” that other nations were reluctant to embrace. America was the unquestioned front-runner in the global restructuring sweepstakes.

That was then. Today, the restructuring playing field has many more players than was the case in the 1980s and 1990s. That’s certainly been the case in Japan over the past several years and now appears to be so in Germany. The balance between headcount reductions and job creation is key in discerning the macro impacts of ongoing micro shifts in corporate performance. The first phase of restructuring is usually dominated by plant closings, outsourcing, and net job destruction -- a distinct negative for personal income generation and consumption. In the second phase, the balance shifts toward renewal, expansion, and net job creation -- conditions that foster a healing of consumer confidence and income generation, which eventually sets the stage for a pickup in private consumption. After a decade of restructuring, Japan may well be on the cusp of entering the healing phase. In Germany, corporate restructuring remains in the painful first phase -- although the gap between job reductions and creation has been narrowing this year. That’s usually a good leading indicator of a shift to the healing phase.

The point is that the US no longer has the restructuring story to itself -- a distinct shift from the climate of the past 20 years. Moreover, Delphi’s bankruptcy underscores the heavy lifting that still lies ahead for Corporate America and the US workforce. That, in turn, draws into question the relative restructuring premium that has benefited dollar-denominated assets over this period. Moreover, there is good reason to believe that the US model will now have to face some new and important challenges of its own -- not just the pension time bomb symbolized by Delphi but also the downside of another asset bubble, shifting political winds, new leadership at the Fed, and the inevitable current account adjustment. This spells unrelenting pressure on US-centric global growth and asset allocation.

Alas, liquidity-driven markets always seem to have a knack of creating a false sense of confidence that long outlasts underlying fundamentals. Most still believe that this year’s under-performance of dollar-denominated assets is an aberration that is about to be reversed. My guess is that dollar-overweight investors are now moving into the final phase of denial. In my view, the biggest anomalies in world financial markets remain the US dollar, US bonds, spreads on risky assets (emerging-market debt and high-yield corporates), and energy prices. And who wouldn’t like gold in this climate?

Yes, I, too, am getting sick and tired of droning on endlessly about the coming rebalancing of an unbalanced world. The wait is always most painful at the end. Remember the early months of 2000? George Eliot put it best in Silas Marner: “The sense of security more frequently springs from habit than from conviction, and for this reason it often subsists after such a change in the conditions as might have been expected to suggest alarm. The lapse of time during which a given event has not happened is, in this logic of habit, constantly alleged as a reason why the event should never happen, even when the lapse of time is precisely the added condition which makes the event imminent.”

[This is not an encouraging sign. Those of us watching closely had hoped that real demand wouldn’t surge again until the first cold snap hit the Northeast but it’s happening sooner. Now comes the real crunch because as demand meets and then exceeds pre-hurricane levels will come the awful realization that some 73% of Gulf oil production and two thirds of the gas production is still shut in. On top of that 109 rigs are still damaged or totally destroyed and we have no clear report as yet as to the status of the pipelines from the Gulf for even those rigs that are still operational. Experts have estimated it might take ten years to get “full” production re-established if at all.

On top of that New Orleans is still a ghost town for the most part when one looks for the big energy corporations or their employees.

These “cheeky” analyses have never taken into account an economic crash during the rebuilding process. Americans are slow, if not belligerently opposed, to learning and changing on their own. Here, in Los Angeles , I am days away from turning the heat on for the first time since April. Remember when you hear that thermostat click this time where you are that this is the sound of collapse; not a big bang, not a clarion-announced moment. It will be at first the sound of a hundred million thermostats clicking that will push maybe ten strings of dominoes on their way. – MCR]

Crude prices move higher on winter energy supply fears and IEA's outlook on global demand.

LONDON (Reuters) - Oil climbed to $64 a barrel Wednesday as investors feared that a rebound in demand would drain off stockpiles and spark a winter fuel shortage.

The slow recovery of hurricane-battered U.S. Gulf refineries and rigs only compounded concern. Washington said on Wednesday it would be "many months" before the U.S. energy hub recovered completely from Hurricanes Katrina and Rita.

U.S. crude oil for November delivery was up 57 cents at $64.10 midday on the New York Mercantile Exchange, having risen $1.73 on Tuesday.

"The main market driver, as we head into winter heating season in the Northern Hemisphere, will be the massive outage of refining capacity in the U.S. and the loss of 175 million barrels of output from the affected refineries," said Michael Wittner of Calyon.

The International Energy Agency, energy watchdog of the West, has said the worst was now behind world oil markets when it came to demand destruction.

Oil demand growth next year is on track for an even faster rate of 1.75 million barrels per day (bpd), up from an already strong 1.26 million bpd in 2005, the IEA said.

China , a major driver of oil demand, is expected to see growth of 600,000 bpd in 2006, up 100,000 bpd on this year, said the U.S. Energy Information Administration.

Quicker growth could lead to yet higher oil prices. The EIA, the statistical unit of the Department of Energy, sees crude costing $64 to $65 next year -- up from $58 in 2005.

Some analysts said signs of an improving U.S. economy, such as smaller-than-expected job loss data for September, backed a healthy U.S. demand picture.

"The hurricanes that battered the U.S. Gulf Coast did not have the impact on the labor market as was earlier expected," said Dariusz Kowalczyk, a Hong Kong-based senior investment strategist at CFC Seymour Securities.

Some 71 percent of U.S. Gulf of Mexico's 1.5 million bpd of crude production capacity was offline along with 60 percent of the region's natural gas production.

The EIA expects some 560,000 bpd of refinery capacity to stay shut in November, falling to 300,000 bpd in December.

"A combination of market supply and demand reactions, combined with the luck of the outages coming in a slow demand period, have allowed the system to cope better than might have been expected," said PFC Energy.

Analysts said U.S. government stock data due on Thursday is likely to give a clearer picture on whether fuel stocks would be sufficient for winter.

A Reuters survey of analysts forecast that distillate stocks, including heating oil, would have dropped 1.7 million barrels last week, which would be a third straight week down.

Gasoline stocks were expected to have fallen by 1.6 million barrels but crude is forecast to have risen 2.1 million barrels.

Yet 73 percent of oil from the Gulf of Mexico remains "shut in" or unavailable because of hurricane damage, and about 63 percent of natural gas production. Prior to the hurricanes, 24 percent of the nation's non-imported supply of crude came from the gulf. There are also eight refineries still shut down representing 2.1 million barrels a day of refined product capacity (900,000 barrels a day of gasoline, 500,000 of diesel and heating fuel, and 200,000 of jet fuel).

For the past month, the European Union has been sending two million barrels of crude a day to the US out of its own emergency reserves. The original deal was made in the brief lull between Katrina and Rita. It took a while for those tankers to get here. The EU imports over 15 million barrels of oil a day itself, somewhat more than the US did in pre-hurricane times.

The Federal government has loaned the oil companies crude from the Strategic Petroleum Reserve. The SPR contained 700 million barrels of crude when the hurricanes hit. The US uses 20 million barrels of oil a day, of which we produce altogether about seven million barrels ourselves. It is unclear how much oil is coming out of it now, but the last time a president tapped the SPR (Clinton) one million barrels a day were released.

These actions have beaten down the price of crude oil on the various futures markets. At the same time, gasoline pump prices have leveled off from the refinery squeeze. I doubt that the motoring public is driving a whole lot less. The commutes haven't magically gotten any shorter out in Dallas and Denver over the past month. The national fleet of SUVs has not been changed out either.

What's happening, therefore is that we have entered an eerie hiatus. Some band-aids have been applied to our oil and natural gas supply injuries and the bleeding seems to have stopped. But the truth is that our energy supplies are badly compromised and at the worst time of the year -- just as we slide into the home heating season. Here in the northeast, we have barely had to turn on the furnaces yet, but that will change in a week or two.

In the background of this scene, the global oil production peak lurks -- meaning that there does not seem to be any surplus production capacity anywhere in the world, including OPEC's big gun, Saudi Arabia. So all we have here in America is a temporary appearance of normality. When the furnaces go on, the WalMart aisles will be empty. If there is any reduction in car trips, it will be because Americans are making fewer visits to the Big Box stores. There will also be fewer trips out to visit the model homes in the new subdivisions.

Another unpleasant truth about the situation is that the US public wants to pretend that everything is okay as much as its leaders do. The public is not so much being misled as demanding that its leaders in government, business, and the news media continue a game of make-believe -- that we can still run a cheap oil economy without cheap oil.

Washington, DC –With the United States extremely dependent on the Gulf of Mexico for energy resources, the one-two punch delivered by Hurricanes Katrina and Rita has created unprecedented challenges. Interior Secretary Gale Norton today provided a preliminary report on damage to oil and gas facilities and the ongoing efforts of the energy industry and the Federal Government to restore these resources.

“Despite such intense winds and powerful waves offshore, we experienced no loss of life or significant spills from any offshore well on the outer continental shelf,” said Norton. “Personal and environmental safety are two of the major goals of the Department of the Interior and our Minerals Management Service (MMS).”

Many workers, including some who lost their homes and possessions, are in the process of re-manning the facilities and preparing them to resume production.

Of the 4,000 platforms that the MMS administers, 3,050 platforms were in the path of Hurricanes Katrina and Rita. The preliminary damage assessment indicates that 108 of the older “end of life” facilities not built to MMS’ upgraded design standards were destroyed. They account for only 1.7% of the Gulf’s oil production and 0.9% of the Gulf’s gas production. Another 53 platforms suffered significant damage. As a result, only a very small percentage of production is expected to be permanently lost.

Major new facilities withstood the storms better, with only one major facility destroyed and four receiving significant damage. Repairs are already underway on the damaged facilities, but a substantial portion of production is expected to require several months to resume.

“Those offshore facilities that withstood the storms best were those constructed to the 1988 MMS upgraded design standards,” said Norton. “Of all of the facilities constructed after the 1988 upgraded standards, only one platform was significantly damaged. We are currently working to determine whether that damage was a result of the storm itself or whether another facility collided with it.”

Since Hurricane Ivan last year, the MMS has been focusing study on the mooring systems of Mobile Offshore Drilling Units (MODU’s), 19 of which were torn from their anchor moorings and went adrift during Hurricanes Katrina and Rita. Secretary Norton has called a November 17 conference at which industry and regulators will come together to address the issue.

The Minerals Management Service has taken a number of actions to facilitate the process of returning energy resources to America, consistent with the need for safety. These measures include expediting review of requests for temporary barging of oil or flaring of small amounts of natural gas; expediting approval process for pipeline repairs; waiving of cost recovery fees until January 2006; and maintaining continuous operations in the Gulf area despite evacuation and relocation of the MMS New Orleans office and damage to district offices.

Figures released this afternoon by MMS indicate that currently 90% of Gulf oil production and 72% of Gulf natural gas production remains shut in. Also 342, or 42%, of Gulf platforms are still unmanned. Seventeen of 134 drilling rigs, or 13%, remain evacuated. Current information will continue to be posted on the Minerals Management Service website as it is collected and verified.

MMS, part of the U.S. Department of the Interior, oversees 1.76 billion acres of the Outer Continental Shelf, managing offshore energy and minerals while protecting the human, marine, and coastal environments. The OCS provides 30 percent of oil and 21 percent of natural gas produced domestically, as well as sand used for coastal restoration. MMS collects, accounts for, and disburses mineral revenues from Federal and American Indian lands, and contributes to the Land and Water Conservation Fund and other special use funds, with Fiscal Year 2004 disbursements of about $8 billion and more than $143 billion since 1982.

[Peak Oil is indeed Imposed by Nature. But the ordeal it will bring has more than one contributing cause: the special viciousness of a crypto-military regime that has ruled the U.S. since 1963; the amazing success of the oil and automobile industries within that regime, as they sabotaged and destroyed the railroads and walkways that might have competed with them; and perhaps most important, the sheer human folly of Us the People. Riding a legacy of cheap energy from 18th Century white supremacist genocides, we devoured coal and then oil with the zeal of a teenage football star at a bowl of televised Wheaties. America was and is the “new world,” and our housing bubble is today’s headline. But the cursed tendency to consume more than we need is as old as Eden, as old as the Neolithic Revolution, as old as Homer. Here in the opening verses of the Odyssey, we’re told what happened when the hero’s henchmen – who symbolize the general population – gave in to their appetites and ate a god’s private herd of cattle:

But he could not save his companions, though he sorely tried;
By their own reckless arrogance they perished: childish fools,
They ate the Oxen of the Sun, and lost their hope of Home.

WASHINGTON - Alan Greenspan is turning up the volume on his warnings about the potential perils of certain risky mortgages if the high-flying housing market loses significant altitude.

There are signs some companies are getting the message. A few have begun scaling back some types of those mortgages or making them less appealing by raising costs.

Greenspan mostly is worried about homeowners who took out an interest-only mortgage or option adjustable-rate mortgages to buy property they otherwise could not afford. Borrowers and lenders holding such loans could get clobbered if housing prices drop or interest rates rise.

"In the event of widespread cooling in house prices, these borrowers, and the institutions that service them, could be exposed to significant losses," Greenspan said recently.

Doug Duncan, chief economist at the Mortgage Bankers Association, said it's "not only Greenspan, but it is also the market" that is driving some changes.

"If you are going to make a loan, you either have to be able to hold it in your own portfolio or you have to have someone to sell it to," Duncan said. As some investors demand a higher return for the risk they are taking, some companies may boost loan costs. "If you change the pricing, there's going to be fewer borrowers for which the loan will be viable," Duncan said.

Interest-only mortgages require that the homeowner initially pay only the interest on the loan for a set period. Option ARMs gives the homeowner flexibility to decide how much to pay each month. One of the options is a minimum payment that covers only a portion of the monthly interest.

These mortgages are appealing to people who need cash for other expenses. But it also exposes them to far greater risk — if housing prices drop, their loan could be worth more than their property. If interest rates rise, their loan will become expensive to pay off.

The Mortgage Bankers Association estimates that interest-only loans accounted for 17 percent of the $1.225 trillion in home loans originated in the second half of 2004, the most recent period for which this information is available. Previously, the association did not break out these types of loans.

Banking regulators are monitoring the flurry of risky mortgages and plan to issue regulatory guidance to banks.

"The easier availability of first mortgages has helped many marginal borrowers obtain loans and it has helped banks sustain loan volume and profits," said John Dugan, comptroller of the currency.

"But looser underwriting standards and the more widespread penetration of riskier mortgage products have raised questions about how these loans will fare in the event of a rise in interest rates or a softening in house prices," Dugan said.

Though there are signs of cooling, home sales still are on pace for a fifth straight record yearly increase, powered by low interest rates. Meantime, prices have skyrocketed.

The average home price soared by 13.43 percent during the 12 months ending June, the biggest gain in more than a quarter-century, according to the Office of Federal Housing Enterprise Oversight.

Nevada had the biggest increase, 28.13 percent, followed by Arizona, 27.82; Hawaii, 25.92; California, 25.16; and Florida, 24.45.

Greenspan has warned homeowners, lenders and investors that they should not count on similar increases. "History has not dealt kindly" with that kind of optimism, he said in August.

When the housing boom simmers down, prices will not rise nearly as much and could fall in some markets, he said.

New Century Financial Corp. is reducing the number of interest-only mortgages it issues to 25 percent during the second half of this year from 33 percent in the first half. It does not offer option ARMs.

A lessened appetite for these loans among investors in the secondary mortgage market was a driving factor behind the decision. In the secondary market, loans are purchased from banks and other lenders, pooled together, then sold to investors around the world.

H&R Block's Option One Mortgage raised the rates to brokers on all its mortgage products, including interest-only loans, by four-tenths of a percentage point. The boost was needed in part because profit margins had gotten extremely tight, spokesman David Gunasegaram said.

The company does not have plans to reduce interest-only mortgages. They accounted for 13.2 percent of mortgages granted to consumers through its retail business in the May-through-July quarter and 24.5 percent sold to brokers through its wholesale business. The mortgage lender does not offer option ARMs.

At Wells Fargo, interest-only mortgages so far this year make up about 25 percent of the mortgages it originates. It does not provide option ARMs. There are no plans to trim interest-only loans.

"We'll monitor the volume. We'll monitor the credit quality and as long as everything looks good we'll continue to offer it," said Greg Gwizdz, executive vice president and retail national sales manager for Wells Fargo Home Mortgage.

For prospective home buyers, there are a multitude of financing choices. That means it is more important then ever to do homework, ask questions and figure out what you can truly afford and be comfortable paying.

Lenders say they lay out to customers the risks and benefits of interest-only as well as other types of mortgages.

"In the end, we are here to provide a service," Gwizdz said. "If the customer really wants it, we are going to give it to them. Keep in mind we do have our credit guidelines. So the person will still have to qualify, will still have to have the down payment and the proper credit scores, the proper income and everything else."