Systemic Risk Still Runs High

Nearly one in four mortgage holders in the U.S. are under water, meaning that their home is worth less than what they owe, according to a story in today's Wall Street Journal. The piece states that this crisis threatens prospects for a sustained housing recovery. The story points out that "These so-called underwater mortgages pose a roadblock to a housing recovery because the properties are more likely to fall into bank foreclosure and get dumped into an already-saturated market. Economists from JPMorgan Chase & Co. said Monday they didn't expect U.S. home prices to hit bottom until early 2011, citing the prospect of oversupply."

Beyond that, you have to wonder what sort of systemic risk would be associated with another round of mortgage delinquencies and foreclosures. If a significant number of people stop (or even slow down) making payments on under-water mortgages, that is going to weigh like an anchor on the mortgage-backed-securities market, which is going to put more pressure on the already-weakened banks, who are going to cut back even more on lending, which is going to put more pressure on the economy, which is going to depress the job market and put more pressure on the housing market, leading to more delinquencies. And if the economy gets stuck in a (another?) negative-feedback loop, will the federal government have the resources to come to the rescue with another round of bailouts?

It's great that the financial markets have bounced back and that the economy is growing again, albeit more slowly than first reported. But the ongoing problems in the housing market mean that a recessionary relapse is still a real risk.