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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Lender concern about strategic defaults has been increasing as more borrowers who can afford to make their payments are making a “business decision” to walk away rather than continuing to make payments on homes that are worth less than their outstanding mortgage. Now, this trend has no taken a new twist as borrowers who are planning to default seek to secure a mortgage on a new home first --a strategy known as “buy and bail.”

Responding to concerns that seniors obtaining reverse mortgages are not fully informed about those loans, the Department of Housing and Urban Development (HUD) has issued new requirements for the counseling sessions that are mandatory for FHA-insured Home Equity Conversion Mortgages (HECMs), which represent the lion’s share of reverse mortgage originations.

Continuing what has become a familiar pattern, June’s economic reports generated mixed signals, some hinting at a strengthening recovery and others threatening a prolonged period of economic blahs.

The financial crisis that drove the economy into a disastrous recession also appears to be challenging conventional wisdom about the primacy of homeownership and the sanctity of policies supporting it.