Up to 10 million homes at risk of foreclosure
through 2012, say analysts
By Matt Carter, Wednesday, January 28, 2009.
The House of Representatives is expected to vote today on an $825 billion stimulus bill that could save millions of jobs and prevent foreclosures, but which might also make the recession worse if the government's growing debt sends interest rates up and the dollar plummeting.
President Obama urged fast passage of the bill, saying new statistics being released every day "underscore the urgency of the economic situation."
"The American people expect ... us to put together a recovery package that puts people back to work (and) creates investments that assure our long-term energy independence, an effective health care system (and) an education system that works," Obama said.
House Republican Leader Rep. John Boehner called the stimulus plan "wasteful and unfocused" and said it would be "irresponsible to pass this massive debt onto our children and grandchildren." Boehner and other Republicans are pushing for an approach that puts more emphasis on tax relief and less on government spending to stimulate the economy.
H.R. 1, the American Recovery and Reinvestment Act of 2009, would earmark money for a range of federal programs and increase or extend benefits payable under Medicaid, unemployment and food-stamp programs. The bill also includes an estimated $165 billion in tax cuts for individuals and $110 billion for businesses.
In an analysis, the nonpartisan Congressional Budget Office estimated that the combination of increased spending and reduced tax revenue would create an additional $816 billion in deficit spending through 2019.
But CBO Director Douglas Eledorf told members of the House Budget Committee Tuesday that the bill would provide a "substantial boost to economic activity," leaving as many as 3.6 million more people employed at the end of 2010 than if the government took no action.
Grim jobs outlook
The U.S. lost 2.5 million jobs in 2008 -- including 1.9 million in the last four months of the year alone, Eledorf testified -- sending the unemployment rate to 7.2 percent. Without more government measures to create jobs and stimulate spending, unemployment could surge to 9.2 percent by early next year, up from the recent low of 4.4 percent at the end of 2006, CBO projects.
Moody's Economy.com chief economist Mark Zandi was even more pessimistic, telling lawmakers that without a stimulus bill the U.S. is looking at a loss of 8 million jobs by late 2010 and 11 percent unemployment by early 2011.
The stimulus plan now being considered in the House "will not keep the downturn from becoming the worst since the Great Depression, but it will ensure that it remains a recession and not a depression," Zandi said.
Even with a stimulus plan in place, Moody's Economy.com projects 5.5 million jobs will be lost and that unemployment will peak at nearly 9.5 percent in the summer of 2010, Zandi said.
Analysts at Credit Suisse estimate that for every 10 people added to the unemployment rolls, there are four potential foreclosures. That's a "back of the envelope" approach that assumes homeowners lose jobs in the same proportion as renters, and that about 60 percent of homeowners who are laid off may lose their homes.
If unemployment peaks at 8 percent at the end of this year, Credit Suisse projects a potential for 9 million homes to enter the foreclosure process from 2009 through 2012. If unemployment continues to rise into 2010 and reaches 10 percent by year end, Credit Suisse sees another 1.2 million foreclosures, or 10.2 million homes in jeopardy.
Many of those homes might be saved from foreclosure through loan modifications by lenders. If 50 percent of mortgages headed for foreclosure are modified and the re-default rate on those loans is 40 percent, only 6.3 million of the 9 million foreclosures envisioned in the more optimistic scenario would be completed, Credit Suisse estimated.
The Obama administration is already committed to putting $50 billion to $100 billion of the second half of the $700 billion Troubled Asset Relief Program, or TARP, into foreclosure prevention programs (see story).
CBO forecasts that national home prices will fall another 14 percent between third-quarter 2008 and the middle of 2010, leaving more homeowners unable to refinance their mortgages because their homes are worth less than they owe. Rising unemployment and the resulting loss of income will also contribute to high foreclosure rates, Eledorf said.
Hefty price tag
According to the CBO's analysis, the bill would provide $43.1 billion for highway construction and other transportation programs; $11.1 billion for housing assistance programs administered by the Department of Housing and Urban Affairs, and $5.2 billion in community development grants to states and cities. The bill also earmarks $48.9 billion for renewable energy and water resource programs; $14.2 billion for science, technology and criminal justice programs; and $4.5 billion for the Department of Defense to repair and renovate facilities.
Former CBO director Alice Rivlin, now a senior fellow at the Brookings Institution, warned lawmakers that they need to offset spending increases that add to the budget deficit by making offsetting spending cuts or by creating new "revenue streams" -- raising taxes.
Not since the U.S. was in its infancy "have we
been so dependent on foreign creditors," Rivlin said. For now, global investors are flocking to the safety of U.S. Treasurys, allowing the government to borrow at "astonishingly low rates," she said.
A failure to tackle future budget deficits could rattle the confidence of creditors and lead to "much higher interest rates" on public and private debt, Rivlin warned. A rapid increase in interest rates and a weakened dollar could deepen the recession and slow recovery, she said.
Rivlin was one of a dozen budget analysts who signed a memo to President Obama urging his administration to follow through on a campaign promise to "scrub every line item in the current budget with an eye to finding items that are either ineffective or outdated."
Zandi acknowledged that the stimulus plan and other bailout measures could more than triple the annual federal budget, from $450 billion in fiscal 2008 to $1.5 trillion this year and next. The federal debt load could rise from about 40 percent of gross domestic product to 60 percent, he said.
But Zandi said the borrowing the government would have to undertake to fund the $825 billion stimulus package shouldn't lead to excessively higher long-term interest rates, because private bond issues are expected to remain low. Even factoring in the Treasury's issuance to fund the growing debt, total credit market needs should remain "modest," Zandi forecasts, with yields on 10-year Treasurys staying below 4 percent through 2010.
Given the intensity of the downturn and the disarray of the financial system, Zandi called the budget deficit and other unintended consequences of the stimulus package "problems for another day."
The Moody's Economy.com economist urged lawmakers to consider additional tax relief measures -- including expanding the current $7,500 tax credit for first-time homebuyers -- that would bring the cost of the stimulus bill to $1 trillion.
H.R. 1 would grant requests from real estate, mortgage lending and home-building industry groups to remove the current repayment requirement on the first-time homebuyer credit, which is scheduled to expire on June 30 (see story). Zandi said lawmakers could go further, increasing the homebuyer credit and expanding it to all buyers of owner-occupied homes through the end of the year.
Zandi also suggested adding a payroll tax holiday in the third quarter, which he said would boost spending by lower- and middle-income households and help cash-strapped small businesses stem layoffs.