Housing is still the epicenter

In a new column for National Journal [link expires in two weeks], I argue that one of the most important gaps in the measures taken so far to revive the economy is the lack of effective action on loan foreclosures.

For months now the Treasury and the Federal Reserve Board have been trying everything they can think of to stabilize the financial system and prop up the economy. You can criticize them for many things--for the regulatory failures that let this unfolding calamity happen in the first place, maybe for the slowness of the initial response, and certainly for the failure even now to devise a coherent, intelligible plan for financial intervention. But you cannot accuse them of timidity or of idly standing by.

In a frenzy of initiatives, they have committed trillions of dollars in various kinds of public support for banks and other financial institutions. Further huge outlays, including a second fiscal stimulus, are on the way. Nobody is any longer denying the gravity of the situation; just the opposite. Yet one critical aspect of the problem has barely been addressed--the still-rising tide of home loan delinquencies and foreclosures.
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Even though the emergency has now broadened--to almost every corner of the U.S. economy and across the world--housing is still at the center. As long as house prices continue to fall, more and more families will find that they have negative equity in their homes (in other words, their outstanding mortgage debt is greater than the current value of their house). The number of delinquent loans will keep rising, and so will the number of mortgage foreclosures. It is a vicious circle, because foreclosures drive house prices lower still. While this goes on, fiscal stimulus or no, a broader economic recovery will be difficult to engineer. The value of mortgage-backed securities will keep sinking, the panic in financial markets will persist, lending will fail to revive, and households will keep trying to retrench.

The article recommends three things: an FDIC-style plan to promote modifications; a change to the bankruptcy code, permitting courts to modify mortgage loans; and temporary tax relief to stimulate the demand for housing, as suggested by Allan Meltzer.

The column had closed before I read that the Treasury is thinking about a plan to lower rates on some new mortgages, and that Ben Bernanke was expressing renewed concern about foreclosures. The Treasury's idea, if it goes somewhere, could be helpful, though I don't know if it would pack the punch of Meltzer's proposal. In any event, this scheme is still not targeted directly at reducing foreclosures. I'm puzzled that this aspect of the problem continues to receive comparatively little attention.