The financial industry has been more than happy to overextend credit to mainstreet, earning massive fees along the way. Without getting into who is to blame or the bailout, here I wanted to think about the consequences going forward. In a classic case of biting the hand that feeds you, the medium term consequence is that millions of folks on mainstreet now have or may soon have bad credit.
The Mortgage Bankers Association said Friday that more than 4 million American homeowners with mortgages — a record 9 percent — were behind on their payments or in foreclosure at the end of June."
chron.com
What will this mean? More below...
Consider:
- 4 million plus getting bad credit. While not all of these folks will be foreclosed on, some will and they will not be able to buy another home for years. In addition, more renters are getting into bad credit due to rising unemployment. This reduces the number of renters able to purchase homes.
- Foreclosures are putting more homes on the market
We see there is more supply (homes for sale) but less demand (buyers with good credit AND a big downpayment). From basic economics, more supply and less demand leads to a fall in price.
And it's potentially a vicious circle, because the more prices fall, the harder it is for folks to sell or
refinance if needed.
The ironic thing is that the bailout is intended to keep credit flowing, but for millions of folks on mainstreet are now locked out of access to more credit.
There is one mitigating factor, population growth provides a need for more housing over time,
but this offsets only a fraction of the number of folks with damaged credit. A second mitigating factor
is of course that folks with bad credit can rent houses, but in many cases house prices may have to fall
even more to make it worthwhile for an home investor to rent the property.
It appears the wall street bailout is a done deal, but clearly it will be only a part of the way forward. Foreclosures will eventually reduce and home prices will eventually stabilize, but the damage to mainstreet's credit will have a profound negative effect on the economy for many years to come. Just keeping families in their home is a worthy goal, but an additional important goal is to help preserve the credit ratings of all families both home mortgage holders and renters alike.
Analogous to problems encountered by the financial industry in a lightly regulated market, it is very easy for mainstreet folks to get themselves into credit trouble because there is very little regulation over how much credit is extended to consumers. It used to be that this meant wall street could make even more money on fees, penalties, and interest, but to use another old saying it now appears that wall street was "eating the seed corn"...they got the fees but after the bubble popped they will lose many customers from their market.
Going forward, there should be more regulation over credit extended to consumers, both for the good of mainstreet and for the good of wallstreet. Right now, Congress should focus on a rescue to stop more folks on mainstreet from getting bad credit.