Statement on Federal Reserve Report

Since late 2008, NDN and I have urged Congress to help Americans stay in their homes by taking steps to reduce foreclosure rates and stabilize housing prices.  These recommendations reflected basic economics: The worst recession in 80 years would inevitably exacerbate the housing bust as abnormally high foreclosure rates drove down housing values.  This, we predicted, would leave all American homeowners poorer.  Moreover, this “negative wealth effect" would dampen both consumer spending and business investment, producing a persistently slow expansion.  Congress refused to take steps, and unfortunately we were right about the results. 

Today, the Federal Reserve confirmed the negative wealth effect we have warned about.  The Fed calculates that U.S. families' median net worth fell by nearly 39 percent from 2007 to 2010.  Average net worth, which is pulled upward by high-net-worth people at the upper end of the spectrum, also fell by nearly 15 percent.  Moreover, the decline in people’s home equity accounted for 82 percent of the decline in the total median net worth of American homeowners.

Congress must finally act to relieve these pressures.  American taxpayers today own Fannie Mae and Freddie Mac.  One step Congress could take would be to direct Fannie and Freddie to provide temporary bridge loans to homeowners whose mortgages they hold and which are in danger of foreclosure.   To be fair to all homeowners, those who accept these loans would return to the taxpayers 20 percent of any eventual capital gain, in addition to repaying Fannie and Freddie for the loans.  This simple measure will help stabilize everyone’s housing prices and stem the negative wealth effect, producing at last a much stronger and more sustainable expansion. 

Update - Watch Rob talking about the report on the NewsHour tonight! (SR)