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The Housing Crisis -- Part 3 of 3

By 3L at Seton Hall University School of Law and Editor-in-Chief of the Law Review.

WaPo's third installment in its analysis of the housing crisis focuses on a less visible (at least compared to the more visible increase in foreclosure filings) effect of the imploding subprime lending market -- namely, the impact on state run investment funds. To wit, Florida officials prohibited local officials from withdrawing funds from its state investment pool. The funding restriction tied up millions of dollars -- some of which prevented school administrators from paying staff. Local official responses and lasting effects of the withdrawal restriction provide an interesting anecdote about the far-reaching scope of the situation.

As for the more visible effects of rising interest rates, evaporating equity, and over-extended homeowners, the article highlights that "[t]he housing problems are often concentrated in low-income, high-immigration neighborhoods in places such as Prince William County[, MD], where there were 3,344 foreclosures last year, up from 282 in 2006 and 52 in 2005."

"Lawmakers also have pursued housing bills to help troubled borrowers trade problematic mortgages for more affordable government-backed loans. But President Bush and his allies in Congress threatened to block the proposals, saying they would cost taxpayers too much." In addition to the added cost to the taxpayer, government action to secure risky loans, rewrite the terms of the existing loans, freeze foreclosure proceedings, etc., all run the very real risk of increasing the cost of capital for future borrowers -- thereby excluding others from joining the ownership society. For example, the proposed bankruptcy rewrite provision (whereby a bankruptcy judge would be empowered to write down the value of an existing mortgage to more affordable terms) has the potential to raise interest rates anywhere from 15 basis points (.15%) (according to Professor Adam Levitin's work in progress), or up to 150 basis points (1.5%) (according to the Mortgage Banker's Association).

Full post as published by Urban Law Journal on June 25, 2008 (boomark / email).