CPEG Commentary on Settlement to End Foreclosure Probe

Authored by CPEG’s Bill Barclay, an expert on the housing crisis with 22 years of experience in the Financial Services Sector

According to press accounts, there will be a deal between the banks and the state Attorney Generals over housing/foreclosures, etc. A bubble in housing prices (driven by finance) got us into the Lesser Depression and it could get us out. But I don’t think this deal is it.

The banks are going to fork over $25 billion, plus access to refinancing by 300,000 homeowners now shut out, and perhaps some payments to 750,000 people who lost homes to foreclosure. This may sound like a lot of money – until you remember the scope of the problem.

The Fed issued a study in Jan 2012 that reported:

(a) 12 million households with negative equity (“underwater”), almost 1/4 of total households with mortgages;
(b) total negative equity of these 12 million is about $700 billion;
(c) 8.6 million of these households were current in their mortgage payments, accounting for $425 billion of the negative equity; (d) the remaining 3.6 million households are all at least 30 days delinquent in payments and
(e) 1.4 million of them are in foreclosure – that is on top of the 4 million or so that have lost homes to foreclosure over the past 4 years.

Another way to put this in perspective is to remember that, in current dollars, in 1933 Congress authorized the Home Owners Loan Corporation (HOLC) to issue debt amounting to almost $50 billion that was then used to buy mortgages from lenders, in essence becoming their refinancing lender on about 21% of all 1 – 4 family dwelling units that existed in the 1930s. (The equivalent number of households today would be about 10 million).

All in all, we have a long way to go – and failure to solve the housing/foreclosure mess means it will continue to act as a drag on aggregate demand and getting the economy restarted.

Image: Salvatore Vuono / FreeDigitalPhotos.net

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