Bruce Judson, in his piece, "The Foreclosure Crisis: A Nation In Denial".
Lost in the various MSM whirlwinds surrounding the New Hampshire Primary, NFL Playoffs, and the usual welter of celebrity riff-raff stories were (1) the fact that Hellicopter Ben Bernanke sent an unsolicited memo warning Congress' finance committees about how housing imperils the economy and (2) the fact that three Fed grandees echoed Bernanke's concerns in separate speeches.
What to make of all this ? Glad you asked. Excerpts from Judson's enlightening article [where all emphases are mine] appear below.
* * *
This memo is notable for several reasons. First, it's important to remember that when the Fed speaks, it does so in sober, limited terms. So an unprompted Fed warning suggesting "a persistent excess of supply" and a "resultant drag on the economy" is comparable to the Secretary of Homeland Security holding a press conference to warn of the risk of an imminent national emergency. Second, an unprompted memo from Bernanke to the House means that he is so deeply worried he felt the need to speak out in as strong a voice as his position permits. Third, the Fed rarely speaks on issues unrelated to its direct activities. Indeed, The Wall Street Journal subsequently wrote that, "For an institution that jealously guards its independence, the Federal Reserve is wading into treacherous political waters." This further underscores the severity of the risks the Fed foresees.
Finally, a further indicator of the depth of the Fed's concerns is what may be an apparently unprecedented set of coordinated speeches by three top Fed officials. On Friday, the presidents of the New York and Boston Fed banks, and Betsy Duke, a Fed Governor, all gave speeches detailing the need for aggressive action to spur a housing recovery.
Today, an estimated 29 percent of all homes with mortgages are underwater. In addition, at least one respected analyst estimates that a total of 14 million homes will be foreclosed on from 2007 to the end of the crisis [emphasis mine]. This represents a hard-to-imagine one in every four mortgages. With foreclosures increasing, there is now such a looming imbalance of supply and demand that, as the Fed notes, further decreases in home prices are likely. Some believe home price reductions of another 20 percent are likely. This would, in all likelihood, have disastrous consequences on at least three fronts--and ripple effects that are impossible to predict.
First, many homeowners would be so far underwater that massive walkaways would be likely. The negative impact on consumer spending of such price declines would almost certainly lead to a vicious cycle of more job losses, leading to further walkaways by struggling consumers.
Second, the mortgage securities market would be in chaos. Nonperforming loans would lead to the forced recognition that bank capital (based on the value of mortgages in bank portfolios) is weak or insufficient.
Third, it is almost impossible to imagine foreclosures on the massive scale anticipated without dire social consequences or even some form of social unrest.
Detailed proposals for addressing this extraordinary risk do exist [see above]. However, they will require a determined effort. There are solutions, but they are not simple.