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.