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EXPERT Q&A: DEAN BAKER

For borrowers in a bad spot, situation may only get worse

September 02, 2007|Diane Wedner | Times Staff Writer

Recent turmoil in the financial market -- specifically the sub-prime mortgage mess -- has focused attention on the impact that a bursting U.S. housing bubble could have on the economy. Dean Baker, co-director of the Washington-based think tank Center for Economic and Policy Research, explained in an interview how the market chaos may affect homeowners and what possible solutions are available. Here is an edited transcript of his comments:

Question: What does a bursting housing bubble mean to the average homeowner?

Answer: It's going to be very bad news. People will see large drops in the prices of their homes. From 2002 to 2005, people borrowed at a rapid rate against their homes to buy other homes, take trips, pay bills. Once house prices start falling, owners lose that source of wealth. Now that credit is tightening, it could get worse. A lot of people who would have bought homes can't.

This is worse than the 1990s' recession -- they didn't have a comparable run-up of prices then. We'll still have a vibrant economy, but middle-income people will be hit hard. Losing $150,000 on a home will affect their living standards for a long, long time.

Question: California has a diverse economy, with several employment sectors doing well. Is the Golden State safer from a recession than other parts of the country?

Answer: California is very vulnerable. The run-up in home prices has been large throughout the state, especially in population centers. The market won't unwind in a day, but it can quickly.

I don't know how we can avoid recession, as a direct effect of the housing situation: Construction is down 20% from 2005; sales are down about 15%. Those will fall further. People in mortgage banks are being laid off. Realty agents will lose jobs; construction workers will lose jobs. The indirect effect is that people will lose the ability to spend at the same rate. There's been a lack of savings in the last seven years. When people cut back on consumption, it's a big hit on the economy. Signs are showing already: July car sales are down; Ford's cutting back production -- they have a large inventory; consumption growth in the second quarter this year was the weakest in years. It's just the beginning.

Question: How can the federal government help moderate-income families who are about to begin foreclosure proceedings?

Answer: Change the rules of foreclosure. Instead of banks beginning the foreclosure process, owners should have the option to rent their house, at a fair-market rate determined by an independent appraiser. And they can stay indefinitely. The bank will own the house. This isn't a windfall for the homeowner. But they're not on the street. Whoever buys the house would have to deal with the renters, letting them stay. People have made mistakes and got bad mortgages; this could help them out.

Question: What should borrowers do if they're about to go into default? Any way to stave it off?

Answer: If someone's got a bad loan and trying to find a way to refinance, this is the worst time; banks don't want to see you. If you're struggling, try to hold on for a while. But be realistic: If you're in a mortgage and you're not close to being able to afford it, think about selling your home. The situation won't be better in six months. If the numbers don't add up, you're not doing yourself a favor by dragging this out.

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diane.wedner@latimes.com

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