Economy Watch: More U.S. Homeowners Underwater in Fourth Quarter

The housing hangover continues; the House holds hearings on the future of the GSEs; and Bernanke beats his drum about the perpetually ballooning deficit.

By Dees Stribling, Contributing Editor

The housing hangover continues, according to a report released by Zillow on Wednesday, with an estimated 27 percent of U.S. mortgage-holders underwater in the fourth quarter of 2010. That total compares with 23.2 percent during 3Q10. Falling home prices have been a factor in the rise, but so have foreclosure moratoria, the report posits.

Fewer than one in every 1,000 (0.09 percent) U.S. homes were liquidated in foreclosure in December, according to Zillow, down from 0.12 percent in October, when foreclosures peaked. But foreclosures are expected to increase again in early 2011, which may cause negative equity to fall, as some underwater homeowners lose their homes and thus are no longer underwater.

“While the [federal homebuyer] tax credits did not hurt the housing market, they did delay its bottom by interrupting the housing correction that was taking place,” Stan Humphries, Zillow chief economist, notes in a statement. “Home value trends in the fourth quarter remained grim, but the good news is that these declines, while painful in the short term, mean we’re getting closer to the bottom.

House holds hearings on GSE morass

What to do about the major unfinished business of financial industry reform, that is, the GSEs? The U.S. House Committee on Financial Services held a hearing on that very subject on Wednesday, with input from an assortment of free-market think tanks, such as the Cato Institute, the Reason Foundation, and the American Enterprise Institute, and a token progressive think tank, the Center for American Progress.

Mark Calabria of Cato suggested putting Fannie and Freddie into receivership, which he argued wouldn’t be such a bad thing (mostly) now that the worst of the recession seems to be over. “If Fannie and Freddie were to experience losses of another $100 billion, then it is likely that MBS holders would experience little loss and holders of unsecured debt would receive about 94 cents on the dollar,” he asserts, though other parties would suffer more: “Money market mutual funds would likely incur significant losses, with several funds ‘breaking the buck.’ Foreign holders, particularly central banks, would experience losses.”

The Reason Foundation’s Anthony Randazzo proposes that the GSEs raise the fees they charge for guaranteeing mortgages, which would help level the playing field between them and private mortgage makers. Cato’s Calabria put a twist on that idea by suggesting that increased fees ought to go toward repaying the U.S. government for its bailout of the GSEs.

Sarah Rosen Wartell of the Center for American Progress urges caution in dealing with the Fannie and Freddie messes. “Rapidly liquidat[ing] the GSEs’ portfolios could also have the unintended effect of reducing recoveries for taxpayers,” she says. “When entities the size of the GSEs put a large number of assets on the market at once, particularly in a soft market, prices will fall. Holding these assets for the markets to recover and selling them gradually into the markets over time is far more likely to maximize recoveries.”

Bernanke’s jeremiad on federal budget’s unsustainable path

Meanwhile, not far away on Capitol Hill, Fed Chairman Ben Bernanke told the U.S. House Budget Committee that Congress needs to stop beating around the bush when it comes to dealing with the federal deficit–but saying so in central bank-ese, of course. “Even after economic and financial conditions return to normal, the federal budget will remain on an unsustainable path, with the budget gap becoming increasingly large over time, unless the Congress enacts significant changes in fiscal programs,” he says.

“Diminishing investor confidence that deficits will be brought under control would ultimately lead to sharply rising interest rates on government debt and, potentially, to broader financial turmoil,” the chairman continues; “turmoil” might be translated as “another panic” in more ordinary English. “Creditors would never be willing to lend to a government with debt, relative to national income, that is rising without limit. One way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point.”

Wall Street turned in a lackluster mixed day on Wednesday, with the Dow Jones Industrial Average eking out a minuscule gain of 6.74 points, or 0.06 percent. The S&P 500 and the Nasdaq lost 0.28 percent and 0.29 percent, respectively.

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