The other day Ben Bernanke came as close as a chairman of the Federal Reserve will come to a public freakout. Call it a subdued, bankerly freakout.
In a speech at Columbia University’s Business School he used the word “crisis” as in “the foreclosure crisis.” Fed chairmen do not generally use words like “crisis”; they use words such as vanilla, cream sauce, custard and tapioca.
What’s got Bernanke scared is that “about one quarter of subprime adjustable-rate mortgages are currently 90 days or more delinquent or in foreclosure. Delinquency rates also have increased in the prime and near-prime segments of the mortgage market…. foreclosure proceedings were initiated on some 1.5 million U.S. homes during 2007, up 53 percent from 2006, and the rate of foreclosure starts looks likely to be yet higher in 2008.”
Spooking Bernanke is the Fed’s discovery that many thousands of delinquencies are not caused by unemployment or even, perhaps, inability to keep up with payments but rather by the quick, steep drop in the price of real estate. “Sharp declines in house prices, and thus in homeowners’ equity, reduce both the ability and incentive of homeowners, particularly those under financial stress for other reasons, to retain their homes,” he said.
“Non-owner occupiers–investors or purchasers of vacation homes,” he went on to say, make up an important slice of those defaulting on their mortgages, as well as those who bought with the assistance of “junior liens (or piggyback loans), often an indicator of little borrower equity at the time of purchase.” All of this is the long way around of saying that many thousands of those whose property is being foreclosed on are not tough-luck families being tossed out of their homes. They are people walking away from an investment because it now is worth less than the mortgage on it.
The denouement Bernanke and not a few others fear is that “high rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets, and the broader economy. Therefore, doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It’s in everybody’s interest. ”
The Fed’s remedy is apparently, first, to stop the drop in prices, and next to push them back up to the point that real estate is at least worth the mortgage debt it carries. A bill presently in Congress aims to do that, although nobody can be certain about its succeeding, since such a thing has not been done before.