Fed’s High Wire Inflation Fighting Effort Risks Triggering a Recessionary Fall

Imagine a high-wire act performed without a net.  That describes the Federal Reserve’s effort to curb inflation without crashing the economy.  Success will bring applause and relief; failure, a brief downturn, at best, with a prolonged recession the worst case outcome. 

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The two indicators currently creating the most angst for economists and policy makers (employment and housing) produced some moderately encouraging signals at the end of the month - sufficiently positive to ease concerns about a recessionary double dip (a little), but not enough to eliminate those fears entirely.

Critics of Fannie Mae and Freddie Mac have argued for years that the quasi-governmental secondary market giants competed unfairly in the mortgage market, had grown too large and too dominant, and posed outsized risks to taxpayers. The implosion of the credit markets and near failure of the GSEs, triggering a multi-billion-dollar governmental rescue that is still ongoing, seemed to prove their point.

If analysts subscribed to the “if you can’t say something nice, don’t say anything” philosophy, they wouldn’t be saying much about the Home Affordable Mortgage Program (HAMP), the Obama Administration’s flagship foreclosure assistance initiative. What they are saying continues to be largely, if not entirely, negative.

Poor underwriting left lenders and investors with untold millions of dollars in failed loans; now poor documentation is making it difficult for them to foreclose. That problem, long simmering in the background, exploded into view late last month when Ally Financial (a reincarnated GMAC Mortgage, in which the U.S. government now owns a majority share) announced that it was suspending foreclosure sales and temporarily halting the evictions of delinquent borrowers in 23 states, pending a review of the company’s foreclosure procedures.