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The U.S. foreclosure crisis: a two-pronged assault on the U.S. economy

  • Tatom, John

The U.S. mortgage loan foreclosure crisis has been called “the worst financial crisis since the great depression.” There are two distinct channels of influence of the subprime problem. The first is the rise in foreclosures that affects homeowners and the real estate industry most directly. The second channel is financial, flowing from the effects on lenders’ financial viability and on financial markets. The timing of developments in these two channels will determine how fast markets work through these problems and restore stability and growth to the nation’s housing and financial markets. The problem is rooted in the housing market, and this market is likely to be very slow to adjust. It takes time for good mortgages to go bad and to then move through to the end of the foreclosure process. While financial markets work much more quickly, they will be held hostage to the unfolding effects of the foreclosures in the housing markets and among lenders. Mortgage loan related losses will continue along with foreclosures over the next year or so and these losses will plague firms even if they have already taken adequate write-downs on their asset values. Complicating the picture is the response of the Federal Reserve, which has reacted chaotically by creating new lending programs that have transformed its credit supply from government securities to private financial institutions, and in the process, violated the first rule of central banking to lend liberally in a liquidity crisis. This failure, compounded by providing a backstop to questionable securities, has slowed market adjustment and risks lengthening and deepening the financial crisis. This paper reviews the emergence of the foreclosure crisis and its real impacts in the economy, the financial market effects of the surge in mortgage foreclosures, the monetary policy response to the problem, and provides an assessment of the outlook for the crisis.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9787.

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Date of creation: 31 Jul 2008
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Handle: RePEc:pra:mprapa:9787
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  1. Kristopher Gerardi & Harvey S. Rosen & Paul Willen, 2007. "Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market," Working Papers 61, Princeton University, Department of Economics, Center for Economic Policy Studies..
  2. Michel Aglietta & Laurence Scialom, 2008. "Permanence and innovation in central banking policy for financial stability," EconomiX Working Papers 2008-21, University of Paris West - Nanterre la Défense, EconomiX.
  3. Tatom, John, 2007. "Why is the foreclosure rate so high in Indiana?," MPRA Paper 4674, University Library of Munich, Germany.
  4. John A. Tatom, 2007. "Why Is the Foreclosure Rate So High in Indiana?," NFI Reports 2007-NFI-04, Indiana State University, Scott College of Business, Networks Financial Institute.
  5. F. Thomas Juster & Joseph P. Lupton & James P. Smith & Frank Stafford, 2006. "The Decline in Household Saving and the Wealth Effect," The Review of Economics and Statistics, MIT Press, vol. 88(1), pages 20-27, February.
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