Federal Reserve Chairman Ben Bernanke warned Americans on Tuesday (March 4th) that the current mortgage crisis would likely continue for a while.  This was obviously not welcome news to home owners, businesses, or financial markets.  Americans are already overwhelmed with negative financial news given fears of an existing or pending recession and the impact of housing and credit burdens already being felt.

Bernanke believes that while the Fed rate cuts, sub-prime assistance, and foreclosure freeze interventions by the government will have a positive impact down the road, he suggested several ways in which lenders and mortgagees could help speed up the process of improving the mortgage situation.  Many Americans are concerned that the government and the Fed have not done enough to improve the economic environment.  Some believe, however that the government has intervened too much.

Some of Bernanke’s suggestions today centered on lenders working to help struggling home owners by reducing principle balances or working with them to create more manageable mortgage situations.  While he praised efforts of some lenders, he wants them to play a bigger role.  Many lenders have pondered ways to help borrowers, but some do not want to take the business hit that would result from forgiving some of the principle balance on their mortgages.

All Americans are either directly or indirectly affected by the ongoing mortgage crisis.  The record number of foreclosures and delinquent payments during 2007, and expectations for new records in 2008, are directly impacting millions of mortgagees.  Over half of the 2007 foreclosures were linked to sub-prime loans.  These are loans set up for borrowers with a poor credit history or low income.

Home owners that are managing their payments and who have been responsible with their loans are upset that irresponsible borrowers are being bailed out for making bad choices.  The challenge is that even responsible borrowers have been penalized in the housing and mortgage slump.  Last year was the first time in forty years that median home values dropped in the US. 

With so many foreclosed homes and other properties available in the real estate market, excess supply and low demand has pushed home values down across the country.  Home sellers and real estate investors are sitting on properties because they either cannot sell them, or do not want to take the current price the market has to offer.  Prospective buyers are also reluctant to take on a new home purchase or mortgage, or are concerned about the ability to sell their existing home.

Bernanke believes that solutions that have more long-term viability are better than band-aid or short-term fixes.  In spite of his encouragement to lenders to help out, he is concerned that many borrowers will only find themselves in trouble again.  Part of the reason home owners that are keeping up with their loans are upset is that the people the government is working to bail out are in their predicaments, in many cases, because of a history of patterned bad loan decision making.  Bad credit is what caused many mortgagees to take on risky sub-prime or other adjustable rate mortgages.

Ultimately, all Americans want to see the economy grow, the housing and mortgage markets rebound, and consumer confidence readings return to healthy levels.  The fine line for the government, lenders, and consumers is set between balancing these long-term goals with maintaining fairness and fiscal responsibility in the short-term.  Investors seem to be on a roller coaster of emotions.  Hope continues to stabilize equities, but every sign of a market surge is met with a negative financial report or comments about continued economic or market weakness.

Market Recap

US stocks were flat on Monday.  The Dow dropped 7 points to 12,258.  The NASDAQ was off 12, while the S&P gained less than a point.  Record high commodity prices and data suggesting more bad news for the economy stifled buyers’ attempts to take hold of the market.  Oil again reached a new high.  The Dow closed down 45 points Tuesday, but after falling over 200 points earlier in the day, the index made a strong late day recovery.  Fed Chief Bernanke suggested the mortgage crisis would continue for a while longer and asked lenders to help.  Oil continued higher.  The NASDAQ and S&P were both flat.

Neil Kokemuller
Tuesday, March 4, 2008
9:44 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA.  He has a MBA from Iowa State University with a specialization in marketing.

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