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| The rise in foreclosed homes like this one in Pasadena, Calif., could cause home prices to drop 6 percent next year, economists
say. Reed Saxon/AP/file |
U.S. moves to stem wave of foreclosures
Steps by Congress and the Fed will ease the problem, but not cure it, experts say.
from the September 20, 2007 edition
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"Prices are dropping a lot," he says, in four key states: California, Arizona, Nevada, and Florida. The buyers who bought near the price peak, in 2004-2006, were also the most likely to hold the riskiest mortgages. These loans featured big resets and were made with little or no down payment.
Some housing experts, in fact, say that federal policymakers should do much more, given the scope of the problem.
"We've got a crisis," says Jeffrey Lubell, executive director of the Center for Housing Policy, a Washington, D.C., research group. The proposed expansion of federal insurance for loans is "a good start but is not aggressive enough."
And, he says, the rate cut offers reassurance but not a solution.
"It will get more credit flowing," he says. But "it doesn't ultimately forestall the foreclosures that are going to happen."
Any housing-crunch relief, whether provided by politicians or the central bank, raises difficult questions of how far officials should go toward a bailout of private-sector lenders and borrowers who, by many accounts, acted unwisely.
Congress, the White House, and the Fed are all navigating that issue cautiously. The Bush administration, for one, is wary of any moves that would make taxpayers liable for a big housing rescue. But none of these parties is taking a do-nothing approach. Several reasons stand out:
•Many at-risk homeowners didn't realize the risks they were taking. Many others, it's true, were buyer-investors, who knowingly took loans with risky terms. But often mortgage brokers focused borrowers on the initial "teaser" interest rate, or promised that borrowers could refinance later to avoid a steep reset.
•Lenders and borrowers are paying a price already. Foreclosure rates have risen to record levels, and some mortgage companies have collapsed. This week the largest home lender, Countrywide, said it has virtually exited the business of making subprime loans to people with poor credit histories.
•The risks to the economy have grown in recent weeks. Foreclosure is just one of the forces affecting home prices. But economists at Goldman Sachs estimate that the rise in foreclosures over the past year translates into a decline in home prices of about 6 percent by next year. A continued decline in home prices could affect consumer spending.
Such a decline also threatens to further expand the number of foreclosures. If home prices are falling, more recent buyers go "under water." If a rate reset pushes them into default, they can't pay off their loan by selling the house.Congress is also mulling other moves, including letting two government-created agencies, Fannie Mae and Freddie Mac, buy risky loans once they're renegotiated, to keep borrowers in their homes. Another proposal is to enable bankruptcy judges to adjust loan terms. Mr. Lubell says other steps should include more money for nonprofit foreclosure counseling and the creation of innovative mortgage products for homeowners at risk.
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