Steps by the Federal Reserve Prevented further Worsening of the Foreclosure Crisis

Posted on April 30, 2009
Filed Under Foreclosure Homes | Leave a Comment

The steps taken by the Federal Reserve prevented further worsening of the foreclosure crisis but it cannot be said to be a complete success. For the time a total collapse of the financial system has been averted. The confidence of the investors has been to some extent restored with the support given by the Federal Reserve. But the lending has not picked up as anticipated. The Federal policies did not solve and actually cannot do anything about staggering household debts, falling real estate and spiking foreclosure numbers.

In February 2008 the Congress speedily introduced the economic stimulus package amounting to $168 billion. It was inclusive of tax rebates for households and cuts for businesses. These measures had a small and short-term effect on the economy. The rebates could be spent only once and this led to a brief spell of consumer spending.

The Obama administration measures are on similar lines but much bigger and hence the impact will be larger. The stimulus package is for $850 billion. The focus is more on spending rather than lowering taxes. It is hoped that this will somewhat diminish the severity of the recession. It is doubtful if it will prevent downward fall of the economy till the latter half of 2010. If by that time the economy continues to shrink then perhaps a third stimulus package will be required.

The question is – will that be feasible? In long terms when the recovery will surface it will be much slower than before because the interest rates and taxes will have to increase to pay for the stimulus spending and tax cutting being done today.

The expanding policies will not solve the basic problem of the economy – the heavy burden of household and business debts. These are leading to bankruptcies and restrain in spending. If the problem is to be solved then a good chunk of the debts has to be written off. There is no other alternative.

Congress passed an anti-foreclosure measure in July 2008 that permitted refinancing of current defaulting mortgages. The value would be 85% of the present market value of the properties and FHA would guarantee these. The onus of taking the first step would be with the lenders. Till now very few of the lenders were willing to suffer losses and refinance by mowing down the principal.

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