March 23, 2008
Where is the floor for house prices?
In this new column for National Journal, I discuss the Fed’s latest manoeuvres:
If banks are too scared to lend and consumers too scared to borrow regardless of interest rates, even the most aggressive easing of monetary policy might fail to push the economy out of recession. That is why, separately from the push to lower interest rates, the Fed is struggling so hard to maintain structural confidence in the financial system — by keeping Bear Stearns in business and by promising to give banks (and now, for the first time, many nonbanks) the assurance of access to short-term loans they are no longer willing to extend to each other.
Where does it all end? If the Fed could be granted one wish, it would be that house prices start to bottom out. That would begin to put a floor under losses on mortgage-backed securities, and help to restore banks’ confidence in one another. Its biggest fear, conversely, is that house prices fall further and faster. A particular risk in that case is that many more borrowers would find they owed more than their house is worth, so that it would make sense for them to default on their mortgage. (Most mortgages are nonrecourse loans, meaning that in case of default the lender gets the house and has no further claim.) If mortgage defaults catch on in a big way, causing a flood of foreclosures and forced sales, it is hard to say where the floor for house prices might be — and the losses for lenders could dwarf current estimates.
You can read the whole column here (the link expires at the end of the week).
My first reaction was one of relief to see a discussion of serious issues, especially the economic crisis, instead of all the media focus on race that was touched off by Jeremiah Wright’s rants (which resemble in so many respects those of white fundamentalist preachers, at least with regard to hatred of gays).
However, unfortunately, racial issues are involved in the subprime mortgage crisis as well, since so many of these loans were made to minority borrowers living in areas that had been “redlined” by conventional mortgage lenders, and who were therefore more ripe for exploitation.
In any even, I would hope that the candidate with the best understanding of and ability to help solve our economic problems will be elected, regardless of race, gender, or statements that someone associated with him/her may have made in the past.
Posted by: algasema | March 23rd, 2008 at 5:26 pm | Report this commentMy latest typo: “In any even” instead of “In any event”. Hopefully, upcoming eye surgery will make all of my tedious typos and corrections a thing of the past, though I do not think it will be likely to change very many of the views I have been trying to express in my various comments.
Posted by: algasema | March 23rd, 2008 at 10:22 pm | Report this commentYawn,
Bear Stearn and Countrywide “exploited” all their way to a $20 Billion loss each in market cap…the attempt to wedge race and victimhood into every political or economic discussion is a loser.
JBP
Posted by: John Powers | March 24th, 2008 at 3:00 pm | Report this commentThanks for your very interesting blog, to which I was referred by Peter David.
However, not sure it is correct to say:
“Most mortgages are nonrecourse loans, meaning that in case of default the lender gets the house and has no further claim.”
I had the same reaction to a similar statement in Stiglitz’s NYT piece the other day, as my layman’s feeling is that recourse is the rule in most states other than California.
Anyway, this is probably a quibble, since as a practical matter most sub-prime defaulters probably do not have much to fear from collection agents chasing their personal assets — this is something that credit card lenders are set up to do but mortgage lenders (if you can find them) are not.
Posted by: dvwlt | March 24th, 2008 at 5:24 pm | Report this comment