The Economy: Foreclosures Make Big Jump In July genre: Econ-Recon

Greenspan And Bernanke

The most recent economic news continues to disappoint...and the housing industry seems to be leading the way. Specifically, foreclosures rose by nine percent from June to July with a total of nearly 180,000 reported.

To understand the magnitude of the problem, these numbers, while much higher than the prior month, are 93 percent higher than July of the prior year.

From The Associated Press:

In all, 179,599 foreclosure filings were reported during July, up from 92,845 in the year-ago month, according to Irvine-based RealtyTrac Inc.

A total of 164,644 foreclosure filings were reported in June.

The national foreclosure rate in July was one filing for every 693 households, the firm said.

"While 43 states experienced year-over-year increases in foreclosure activity, just five states — California, Florida, Michigan, Ohio and Georgia — accounted for more than half of the nation's total foreclosure filings," said RealtyTrac Chief Executive James J. Saccacio.

In recent months, the mortgage industry has been battered by rising defaults and foreclosures, primarily driven by borrowers with subprime loans and adjustable rate mortgages.

There is little reason to expect the housing crisis will improve in the near term. In fact, one might be safe to conclude that we have yet to reach the bottom. As I understand the outstanding issues, we have just begun a major period of interest rate adjustments on loans that were written during the boom period of refinancing. As those loans are reset at higher rates, we may well see another burst of foreclosures as well as additional downward pressure on home prices.

Adding to the economic uncertainty is the newness of the Bernanke era at the Federal Reserve. Since he assumed the lead at the Reserve, Bernanke has been focused on keeping inflation in check. Unfortunately, the current financial crisis seems to have caught the Fed chief by surprise...leaving many financial types skeptical of his grasp of the problems and uncertain of the measures he will take to effect a gentle and much needed correction.

From Bloomberg:

Aug. 21 (Bloomberg) -- Federal Reserve policy makers don't expect to know for days whether their Aug. 17 discount-rate reduction will succeed at calming markets, Fed watchers say.

"What the Fed wants to do is buy time to sort these things out,'' said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.

Bernanke would prefer not to resort to an emergency cut in the benchmark interest rate, which hasn't happened since 2001, said Joe LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York.

"The Fed doesn't want to bail anybody out,'' LaVorgna said. "If they can get through the next couple of weeks, maybe cooler heads will prevail.''

American capital markets continued to show signs of stress in the second day of trading since the Fed's Aug. 17 discount- rate reduction. Investors fled even money-market funds, considered among the safest instruments, on concern that the funds, which hold $2.5 trillion, have invested in risky collateralized debt obligations backed by subprime mortgage loans.

I'm a bit puzzled by the apparent surprise exhibited by the new Federal Reserve Chairman...though it likely makes sense since Bernanke did work under Alan Greenspan and was apt to agree with the policies of his predecessor.

At the same time, many observers believe that the prior Chairman is responsible for the housing crisis as a result of employing artificially low interest rates and enabling easy access to mortgage funds by individuals with suspect credit...all in hopes of sustaining economic growth.

Frankly, the current housing mess is simply an indication that the market is finally enacting the adjustments one would expect in reaction to the questionable practices. While Greenspan's actions may have prevented a slowdown, the end result may well be the makings of a recession.

Unfortunately, Bernanke will be pressed to review and respond to a difficult and dynamic environment with very little room for error. I don't envy his situation.

Tagged as: Alan Greenspan, Ben Bernanke, Federal Reserve, Foreclosures, Housing, Sub-Prime Lending, U.S. Economy

Daniel DiRito | August 21, 2007 | 8:45 AM
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Comments

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I work for CurrentForeclosures.com, a foreclosures site and have seen a huge increase in the number of foreclosures in the past 7 months. I believe it is a combination of not only sub-prime and ARM mortgages, but also the high number of people who have gotten loans with interest rates at an all time low... in addition to the rapid depreciation in some areas and the difficulty some are experiencing in selling their homes.

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