Breaking the Housing Crisis Cycle

Cleveland, Ohio (May 14, 2009)—In its annual report, released today, the Federal Reserve Bank of Cleveland documents how the housing crisis cycle unfolded differently in its district than it did in other parts of the country. The Cleveland Fed also is proposing a multi-faceted approach to breaking the cycle that focuses on the interconnected nature of the problems that led to the crisis.

According to Federal Reserve Bank of Cleveland research, areas within Ohio, eastern Kentucky, western Pennsylvania, and the northern panhandle of West Virginia didn’t suffer from the crash of hyper-inflated housing prices, as happened in California, Florida and other overheated housing markets. The underlying problem was over-lending to people in a region that was under stiff economic pressure long before the recession set in.

Too many people ended up in mortgages they couldn’t afford, and when the economy took a nosedive, many of them became delinquent and defaulted on their loans.

Those defaults led to a high number of foreclosures, which led to an oversupply of housing, which led to home prices depreciating and borrowers and financial institutions taking on big losses.

To break the cycle, the Federal Reserve Bank of Cleveland supports taking the following actions:

The Cleveland Fed’s research shows that each pressure point in the housing crisis cycle feeds off and affects others, which is why the regional reserve bank is advocating a coordinated approach. It also recognizes that the problem took a long time to develop and recommends that efforts to return the region to health be sustained over the long term.