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Mortgage Crisis Delivers 'Stealth Stimulus'

Posted on Tuesday, November 2, 2010

The silver lining to the foreclosure crisis cloud, which has stalled foreclosures nationwide, may just be the economic boost that comes from a temporary free ride. The Wall Street Journal puts a number on that "stealth stimulus" -- $2.6 billion a month.
The money saved as debters don't pay their mortgages comes out to about a quarter of a percent of national income, the WSJ says, adding that's the rough equivalent of what the wealthy save from the Bush-era tax cuts. The WSJ quotes a Las Vegas woman who stopped paying her mortgage on 2008 and -- until she lost her home last month -- got a boost from being in default. "I was able to make my car payment and keep from losing my car, and I was able to pay the utilities," she said. Some borrowers with delinquent mortgages, the WSJ adds, even rent out their homes to make an extra buck.
There are, of course, problems with this "stimulus." It takes a toll on banks, which, as they work to verify mountains of potentially flawed paperwork, face complaints from investors in mortgage bonds and a criminal investigation from the Federal government. If this means banks are getting what they're due, collateral damage is being dealt to local governments, which can't collect property taxes from borrowers in default.
But as The New Yorker's James Surowiecki points out, the mortgage crisis isn't as bad for the economy as it may seem. That sales of foreclosed homes are stalled could actually mitigate the housing market's problems by limiting supply: "dumping another million foreclosed homes onto the market hardly seems economically essential," Surowiecki writes. He continues:
More important, making foreclosures tougher to get and more expensive to process could push banks to get serious about modifying mortgages, which at this point is the best route to getting the housing market back in reasonable shape. Up to now, it's often been easier and cheaper for banks to foreclose, and mortgage servicers commonly make more in foreclosure than in modification. But being forced to follow the law before foreclosing, and having the threat of criminal investigation over their heads, may change that calculus.
Huffingtom Post William Alden

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