Fed`s Rosengren Says Weak Housing Market Complicates Economic Outlook, Friday, May 30, 2008 1:40:32 PM

The `continued downside risk` of falling home prices was the focus of a speech by Boston Federal Reserve President Eric Rosengren on Friday. Rosengren noted that residential investment would likely decline this quarter, making it the tenth consecutive quarter of decline and clouding the economic outlook for the U.S. economy.

`This has been an unusually long period of continuous decline in the housing sector, and coupled with falling housing prices nationally, has complicated predictions of what will happen in the economy going forward,` Rosengren told the New England Economic Partnership.

He linked the length of decline of housing prices to the economic outlook. Rosengren praised `aggressive` monetary and fiscal policy actions by the Federal Reserve and other agencies as keeping the fallout from the financial turmoil `relatively benign.`

`These policies will likely result in some pick up in economic activity in the second half of this year, which should help to stabilize the housing market,` the Boston Fed President predicted.

Continued economic turmoil, especially combined with a rising unemployment rate could result in further deterioration of the housing market, Rosengren warned.

`Should the economy worsen and suffer a period of significant job losses, the housing problem could become much more severe,` he noted.

He added that, based on past events, the high foreclosure rate that the markets are currently weathering `may be longer than some are anticipating.`

Based on research by economists at the Boston Federal Reserve Branch, Rosengren said, `Less than 10 percent of…homeowners with negative equity will default.` However, this number could increase if a myriad of factors, including declining home prices, increased unemployment, and a propensity towards defaulting on home mortgages.

`It is clear that servicers were not set up for the spate of elevated foreclosures we have already experienced, and further increases in foreclosures would certainly test the capacity of servicers to have sufficient staff with the expertise to make loan modification determinations,` Rosengren said, referring to the challenges facing those working towards loan modifications.

He added, `Nonetheless, I am hopeful that the many mortgage forums that are being organized around the country to try to get servicers and borrowers together to work with problem loans will help some borrowers.`