Efforts by the Fed, ECB and other major central banks to keep credit markets supplied with dollars, as well as bank recapitalization efforts, are critical to ending the financial crisis, but they won't achieve their goal if more is not done to get at the root cause of the crisis: mortgage foreclosures, economists generally agree.
As Sinai and BloggingStocks' Peter Cohan have noted, home foreclosures are the source of the bad bond problem -- at once both turning selected mortgage backed securities to notes barely worth the paper they're printed on and also weakening banks' balance sheets.
FHA, others must move 'at full-speed on refinances'
Further, economist Richard Felson said it's time for federal officials, in the Federal Housing Authority, Fannie Mae (NYSE: FNM), and Freddie Mac (NYSE: FRE) to "move at full-speed and get as many at-risk mortgages refinanced at lower, fixed rates."
"What we want to avoid is getting the credit markets up and running again, then six months later face another tidal wave of home foreclosures. That would drive another cycle of bond defaults, bank and financial institution bankruptcies and then we'd be right back where we started, with re-frozen credit markets," Felson said. "We've got to inoculate the system against more home foreclosures and if the FHA, Fannie, and Freddie need more money to do it, Congress should appropriate it."
Housing Sector / Economic Analysis: Cogent points, all. Foreclosures lead to bad bonds -- what caused the financial crisis in the first place -- and they also make it very hard for housing prices to start to recover -- something economists say must occur for U.S economic growth to resume at a healthy rate. Hence, the goal of the FHA and other appropriate housing refinance parties should be: refinance as many at-risk mortgages as possible to check the flood of foreclosures.
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Reader Comments (Page 1 of 1)
10-17-2008 @ 5:57PM
roger said...
The forclosure problem is indeed at the root of the problem, but subprime mortgages are actually not the biggest culprit and giving people lower interest rates will not solve the problem because the biggest problem is high property taxes and insurance costs in much of the country and particularly in those areas with high forclosures, like Florida where I live. In past real estate downturns, investors would buy bargain properties and rent them out to cover the cost of owning the property. This is not happening now, since property taxes and insurance cost more than you can rent the property for. Therefore there is nobody stepping in to set the bottom. Property taxes, or properly named homeowner taxes, must be drastically reduced for the real estate market to rebound. Unfortunately, in better times, our local government leaders negotiated higher salaries, benefits, and outrageous retirement packages for our county and city employees, all to be paid for by an ever increasing property tax base. They approved every project even as everyone knew that a bubble was being created, because they thought the new developments would only lead to more property tax collections, and thus more money for themselves. When are some of the geniuses in government and in the media going to even acknowledge the existance of this problem.
10-18-2008 @ 7:20AM
Randy said...
Until the 1st time home buyers can get down payment assistance from the sellers or from the $7500 tax credit the foreclosures will continue. Currently there is no way for 1st time home buyers to get the $7500 tax credit until they file their taxes come Mar or April of 2009. If the lower priced homes don't sell then the middle and higher priced homes won't sell and the cycle continues. BlueTree