Breaking the Housing Crisis Cycle

The 2008 Annual Report of the Federal Reserve Bank of Cleveland

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:

• Provide financial incentives to mortgage lenders and servicers to modify loans for borrowers in trouble
• Help troubled borrowers stay in their homes by converting them from owners to renters
• Beef up code enforcement and clear legislation for land banks to help local governments better manage properties left vacant by foreclosure
• Help banks and financial institutions recapitalize so they can lend with confidence

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.

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell, doug.campbell@clev.frb.org, 513.455.4479