San Francisco Fed president Janet Yellen is concerned about recent economic data and recommends more action to save homeowners from foreclosure. From Bloomberg (hat tip reader Dwight):
Federal Reserve Bank of San Francisco President Janet Yellen said recent data on the U.S. economy is “deeply worrisome” and the government should consider new ways to help homeowners and stem foreclosures.
“Clearly, we have a long way to go before the credit crunch shows significant healing,” Yellen, 62, said today in the text of a speech in Berkeley, California. “We are in the grip of an adverse feedback loop,” in which tighter credit conditions are exacerbating economic weakness…..
“Recent data on the economy has been deeply worrisome,” Yellen, who doesn’t vote on interest rates this year, said during a symposium held at the University of California, Berkeley. In the current quarter, “it appears likely that the economy is contracting significantly” and “inflation risks have diminished greatly,” she said…
The Fed’s actions to lower rates and boost liquidity “have been helpful,” Yellen said. “But the enormity of this crisis required more,” she said, adding that she supports increased aid to homeowners.
“The effects of the growing credit crunch have outpaced the easing of policy, and, indeed, every major sector in the economy has been adversely affected by it,” Yellen said…
Home prices in 20 U.S. cities fell 16.6 percent in August from a year earlier, and have dropped every month since January 2007, the S&P/Case-Shiller home-price index also showed this week.
“Unfortunately, this is another case where the bottom is not yet in sight,” Yellen said of home prices, adding that “direct assistance to homeowners and the housing market are worthy of serious consideration.”
With the dollar appreciating against other currencies, “exports will not provide as much of an impetus to growth as they did earlier in the year,” the bank president said.
The text of the speech is here.
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Yellen is right to be concerned given that her area of purview includes the epicenter of the housing crisis, California. But, there is little useful the government can do. The actual healing is taking place through the painful process of assets adjusting to incomes. It is excruciating for those caught unprepared! However, believe it or not, we are making progress.
I find the -0.3% very suspicious considering the downward spiral in consumer spending an job losses in the last month. It’ll likely be revised lower in November.
These mortgages are contractual agreements by willing parties, to borrow and repay specific sums of money under specific terms. Is the government now supposed to annul those contracts and/or rewrite the terms arbitrarily? Is the government now supposed to take tax money from responsible borrowers who did not buy too much house, or did not borrow excessively on their existing house and give that money to irresponsible borrowers to pay down their debts? Is the government going to unilaterally demand that the lender of the money now must accept less than was contractually promised in repayment? I think most rational people would agree that these approaches would make no sense. Particularly, if there is to be an affordable mortgage market in the future.
If we are talking about people who either bought a home in the last few years that was more expensive than they can afford, or if we are talking about people who borrowed too heavily against their existing home and now can’t afford to repay their loan, how does the government fix that in a way that is fair to the rest of us? It is important to remember that these over-extended borrowers are the very people who are responsible for driving house prices to irrational levels in the first place. Without their profligate borrowing and spending, there would have been no housing bubble and home prices would not have risen to unsustainable levels. The fact that money was lent too easily should mean that the lender of that money should bear the risk, and the loss, if any. The fact that some people borrowed in an irresponsible manner and spent the money on over-priced real estate should mean that the borrower, and that borrower only, bear the risk and the loss if any.
I agree that homeowners should have their share of responsibility too and unfortunately any aid package will go to the people who need it least as usual. People who borrowed against their home to pay their medical bills or other difficult circumstances could certainly use help but the sad thing is they would have been the first to lose their homes.
Instead we will see billions go to those who bought multiple home using the rising prices to finance their real estate adventures.
With the continued lunacy of these “all you can eat” buffet plans, I think when they ultimately figure out what the average cost of helping each home owner/speculator is they owe every renter these last ten years a check for double that amount. Consider it a thank you for not being part of the problem.
We are definitely being charged for the solutions, which won’t work of course.
When these same folks were going to sell their houses in the prior bubble I hadn’t read where they were going to cut me a check! Now they want mine.
As predicted earlier, we have gone off the rails.
Well Patrick its not like the Fed cares about renters and the even if Barack Obama wins it’s not like he can look at the trillions of debt piled up and say ‘it wasn’t us, it was Bush, we aren’t paying it’. Future working Americans are getting the worst deal in history, if we avoid a depression now look forward to one 5 years from now as all the easy money changing pockets right now disappears again and this time we won’t be able to rescue ourselves.
The FOMC is a broadly diverse group of people with widely divergent opinions.
Of all the FOMC members, Ms. Yellen is clearly the one who is most concerned about a deflationary burst and all the adverse consequences that would entail.
We don’t want that genie to get out of the bottle. We still have some time.
I’ve followed her for many years and my opinion of her has grown greatly with time. She has truly grown into the job in an excellent fashion.
Matt Dubuque
anon at 5;12
Give the banks 700 billion dollars? Sure, go ahead.
Give my neighbor a cut on his mortgage? No way, not fair.
Cut off your nose to spite your face.
How much does your house value go down if your neighbor goes into foreclosure? There is a number, last I checked in the 5% range, no sure lately.
Get over it.
Fair to the rest of us?
I’m a responsible renter. I wish housing prices were lower in my area, but I think it’s more important that I have a job, a functioning 401(k) plan and (most important) a functioning bank accountant.
So, yes, it’s unfair if the people who own homes and SUVs get bailed out while I, who live in a shabby rental and take public transit, get nothing. But I’d rather be jerked around then end up living in a shantytown trying to scrounge up roots and berries.
– invisiblehand64114
I recommend that people read the actual link provided as to what Ms. Yellen actually said.
I thought one quote in particular was noteworthy and it ties in with a recent point former Fed Governor Mishkin made in his widely ignored (but essential) paper presented at Jackson Hole this summer.
Here is Yellen’s quote, in which she quotes recent Fed research about mortgage delinquency rates:
“The SINGLE best predictor of the level and change in these delinquency rates is the pace of house price increases or decreases.”
I urge people to reread that and let it sink in.
Delinquency rates are more closely correlated with the price of your house than ANY other variable.
Original research from the Fed.
Mishkin’s point was along similar lines. He said that being 10% “underwater” seems to be the tipping point for much greater numbers of people walking away from their homes entirely and leaving the banks holding the bag.
As Bernanke pointed out last spring, preventable foreclosures are what we need to focus on above all else.
Otherwise a deflationary burst becomes unavoidable, despite what the empty heads of CNBC say.
Matt Dubuque
what they want to do is refinance at lower rate.
but refinancing makes the recourse loans. PEOPLE WHO ARE UNDERWATER ON HOMES WOULD BE FOOLS TO CHANGE TO A RECOURSE LOAN WHEN THEY COULD WALKAWAY.
Re: The actual healing is taking place through the painful process of assets adjusting to incomes. It is excruciating for those caught unprepared!
>> IMHO, the healing will begin when the LHC is fixed and up and running at high speed, and not a moment too soon, I might add.
God's speed!
Yellen is trying to put lipstick on the piggy greed train that is now off the tracks.
It is interesting to note in these comments the conflation of thoughts about what is right to do for my neighbor’s mortgage problem and and similar thoughts about the bailout fiasco of the financial system.
The excesses of the financial system are why we are on the edge of becoming a 3rd world country, not the mortgage bubble. Where is the public clarity about that?
The train is off the tracks because the current administration chose to not only not admit the financial excess problem but throw money at the actors in hopes they could tame their ponzi scheme before a meltdown.
What ever happened to integrity and consequences for moral failings. If this a race to the bottom, kiss your ass goodby.
I found it curious that the timing of this coincided with the final hour of trading contributing to yet one more super volatile session. (I agree with what she is saying, as did the markets for a nano second.
Matt,
I am familiar with the home price appreciation versus foreclosure analysis, in fact we featured it here in March.
However, ALL those analyses are based on historical data with POSITIVE home price appreciation, and there the correlation is strong. It is not clear now strong the relationship is in a negative HPA environment.
Perhaps more important, the causuality may flip when you go from positive HPA to negative. In a positive HPA environment, you see fewer defaults at higher HPA levels because even deadbeats can refinance their way out of trouble. In a zero/negative HPA environment, you cannot refinance or sell your way out of trouble. Thus the NATIVE driver is getting to zero AND have overextended borrowers. Once you get to zero, the main driver may be other factors, such as neighborhood concentration of people who got zero down payment loans and teasers. The level of foreclosures may be due to other factors but is then reflected in negative HPA.
Tanta has often stressed that the idea that people voluntarily walk from their homes is very much exaggerated by the media.
Jim Hamilton, who is no empty head at CNBC, says deflation is completely avoidable and the Fed seems pretty determined to avoid it.
http://www.econbrowser.com/archives/2008/10/deflation_risk.html
How about- America -Growing Wasteland?
California rationing water as dust-bowl rages.
http://tinyurl.com/5axvtz
Speaking of weird GDP tidbits related to PPP:
GDP includes the output of the multinational sector, which is very significant in Ireland (over 90% of Irish exports are made by foreign-owned firms), it is more useful to use Gross National Product – the total value of final goods and services produced in a country plus income from Irish capital held abroad set-off against transfers of net earnings of multinationals – in effect net income outflows from Ireland . In Other OECD countries, there is only a marginal difference between GDP and GNP.
Because exchange rates do not always reflect international differences in relative prices, The comparison of GNI per capita estimates into international dollars using purchasing power parity (PPP) rates, can be viewed here.
The PPP method gives Ireland a per capita income of $35,900 in 2006 compared with the Atlas method of $45,580.
Gross national income per capita 2007, Atlas method and PPP
http://siteresources.worldbank.org/DATASTATISTICS/Resources/GNIPC.pdf
???
I’m assuming that the AIG move to have all its CDS’s guaranteed is causing this move toward mortgage relief. We have already spent or promised billions to AIG, and we might well have to help them with their foreclosure losses. In other words, since we’re already on the hook, why not try and halt the foreclosures. I’m not recommending that necessarily, but I think it’s behind these moves to forestall foreclosures. Again, we might well end up dealing with them anyway. And that’s just AIG.
Don the libertarian Democrat
I think it is deeply worrisome that Yellen states a “correlation” is a “predictor”
REOs and their sales continue to grow thus lowering existing home values. The excess housing will take years to assimulate. Plus you can’t force consumers to spend. How’s that for predictors?
All of the proposed ‘work outs’ so far have included a provision to make the reworked mortgage a recourse loan.
No sane person is going to sign such a loan agreement when they are waaaay underwater on their home.
All the government is seeking is the insurance of recourse loans to help bolster the banks balance sheets. With recourse loans on the books the banks will suddenly have money good mortgages to replace the worthless garbage that they are now sitting on. The Fed doesn’t give a damn about home owners or they would not be including rediculous recourse provisions to loan work outs proposals.
If she thinks people need mortgage aid, she’s free to choose a borrower — at random even — and start making their payments for them. Just don’t start asking me to join in.
I agree with the predominant view that bailing out homeowners is a bad idea.
Government operates by written rules at the consumer level. Who will actually get refinanced and what will the benefit be? If by missing a few payments you can knock 200K off your mortgage, or 300$ a month off your monthly house payment, lot of people will be inclined to do that. People do not want to be played for suckers.
What criteria should be used? Should any house over 750K be in the program? Should any family with income over 200K…150K… 100K be eligible???
As Bernanke pointed out last spring, preventable foreclosures are what we need to focus on above all else.
I would like to see a definition of ‘preventable foreclosure’, and also an explanation of exactly how it can or should be prevented.
And Bernanke has pointed out a lot of things that turned out to be completely wrong.
Fresno Dan…
It is not a ‘bailout of home owners’ that is being sought. It is a another bail out for the clowns that caused this financial disaster…the banks.
If recourse provisions are placed in ‘mortgage work out loans’, who benefits? The banks suddenly have ‘money good’ mortgages that will make some of the level 2 and 3 garbage they are sitting on look better, perhaps even good enough to sell to some other fool.
I have seen no plan yet that is beneficial to home owners.