Housing woes will ripple through economy for years, Boston Fed president says

New England should expect high levels of foreclosures to continue for years even under relatively favorable circumstances, said Eric S. Rosengren, president of the Boston Federal Reserve Bank.

Rosengren, addressing the New England Economic Partnership meeting in Boston today, said Boston Fed researchers examined the real estate crash of the early 1990s. They found that even though foreclosures peaked in 1992 they remained at high levels for most of the rest of the decade.

The current situation, however, is perhaps more worrisome than the ‘90s. The region has experienced high foreclosure rates similar to the ‘90s even though the economy is much stronger, Rosengren said.

Unemployment in Massachusetts for example is about half the peak jobless rate of the ‘90s recession of 9.1 percent.

“Declining housing prices alone did not cause very elevated foreclosures,” he said. “It was significantly compounded by an economic shock such as the loss of a job.”

Today’s high foreclosure rates are likely the product of relaxed lending standards that drove the recent housing boom, Rosengren said. As a result these borrowers are even more susceptible to financial setbacks because they took on so much debt.

Many of the loans made in recent years required little or no down payments, Rosengren said. Instead, traditional down payments were replaced by secondary or “piggy-back” loans, Rosengren said.

These loan structures make the mortgage mess even more difficult to clean up, Rosengren said. Typically the primary and secondary loans were packaged and sold as securities to investors. In many cases the primary and secondary loans are held by different groups of investors making it even more difficult to modify troubled loans to prevent foreclosures.

Meanwhile, a popular type of secondary loan -- the home equity line of credit -- is experiencing a sharp rise in delinquencies, another sign housing woes are infecting broader consumer credit. Equity lines of credit are typically used to finance home improvements and major purchases, such as cars. Delinquencies among these loans, which represent about one-third of residential mortgages held by banks, are exceeding those of the early ‘90s, Rosengren said. Other consumer loans, particularly in parts of the country hardest hit by the housing bust, are also experiencing rising delinquencies.

Ultimately, these increasing delinquencies put more banks at risk, not just those with large holdings of mortgage-backed securities. That could worsen the credit crunch that is contributing to the nation’s economic downturn. “While small- and medium-sized businesses have not generally experienced significant problems with credit availability to date,” Rosengren said, “further deterioration in housing markets, if it occurs, could carry over and begin to impact lenders who serve such borrowers.”
(By Robert Gavin, Globe staff)