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The Way Ahead: A Framework for Policy Responses

December 9, 2008
Mortgage Lending

Presented by Kathleen Keest, Senior Policy Counsel-Center for Responsible Lending at the symposium "The Subprime Housing Crisis: Interdisciplinary Policy Perspectives" October 10-11, 2008 at The University of Iowa, Iowa City, IA

In many respects, events have overtaken this conference. In 2006, CRL released a study that projected 2.2 million foreclosures of subprime mortgages.[1] But by this spring, Credit Suisse projected 6.5 million foreclosures over the next five years, as the housing crisis spread beyond the subprime sector into the larger mortgage market.[2] There is a downward spiral of declining housing prices, which begets defaults and foreclosures, which beget further declines in housing prices. And so it goes.

With this downward spiral continuing, the first and foremost of the needed policy responses is clear: a circuit-breaker to stop the foreclosures. We must arrest the decline in the housing market, and that requires more effective foreclosure prevention efforts than have thus far been put in place. Beyond stabilizing the housing market, restoring balanced rules to govern the market and reforming the ill-functioning oversight system are the next order of business.

To assure that we have a viable framework for policy responses, it is necessary to understand how we got here. First, we must accurately diagnose the market failures that caused the subprime meltdown, and the regulatory failures that failed to stop it in time. But the crisis has laid bare other foundational cracks in our economy. Most obvious is the systemic weakness it exposed in our financial system. Less discussed in the national conversation so far, but equally important, is the economic state of the American household, which has something to tell us about how and why housing debt came to play such a central role in the American economy. Though in-depth analysis of these issues is not the focus of this symposium, we must at least acknowledge that they are inextricably intertwined with the mortgage crisis.

This paper first discusses the defining traits of the subprime market, and how perverse market incentives maximized risk, rather than minimizing it (part II). It then briefly explains the link between declining housing prices and increasing foreclosures (part III). Part IV gives an overview of the state of the financial health of American households, to place the explosion in housing debt in a larger economic context. Part V then suggests steps that must be taken immediately and in the near-term to stabilize the current situation, and prevent the resurgence of an industry that planted its own seeds of destruction.



[1] Ellen Schloemer, Wei Li, Keith Ernst, and Kathleen Keest, Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners, Center for Responsible Lending (December, 2006).

[2] Credit Suisse, Foreclosure Trends: A Sobering Reality (April 23, 2008).