By Michael Hudson and Aaron Mehta, iWatch News
As the financial markets roil, one of the critical factors weighing down the U.S. economy is the flood of home foreclosures. Thursday's crash underscores how difficult it will be for the economy to make significant strides while the housing market is still in tatters.
The pace of the housing market recovery may depend in part on the outcome of intense negotiations underway among state and federal authorities and the nation's five largest mortgage servicers.
Government officials are negotiating with the firms -- Bank of America, JP Morgan Chase & Co., Citigroup, Wells Fargo & Co. and Ally Financial Inc. -- over allegations of widespread abuses in the foreclosure process. State attorneys general around the country have been investigating evidence that the big banks used falsified documentation to process foreclosures.
In its first report to Congress, the all-star team made up of Washington's top financial regulators recently warned that the United States faces potential losses connected with the European debt crisis.
Any assumptions of market stability, the Financial Stability Oversight Council said, should be met with "a heavy dose of skepticism."
Thursday's dizzying stock market plunge is a sign that the U.S. financial system still needs serious reform, advocates for tougher regulation of the financial industry say.
The market swoon - the steepest drop in U.S. stocks since the 2008 financial crisis - comes amid a continuing debate over the economic impact of regulations to carry out the Wall Street reform law.
Four of the five companies under scrutiny--Bank of America, JP Morgan, Wells Fargo and Citigroup -- are major donors for state and federal political campaigns. Between them, they have donated at least $8 million since the start of 2009 to candidates, party committees and other political action committees, according to an iWatch News analysis of campaign finance data.
(Ally Financial hasn't given money during that period to campaigns under its current name or is previous name, General Motors Acceptance Corp., or GMAC).
The fate of foreclosure negotiations could go a long way toward determining where the housing market will go in the next few years.
Normally, the housing market plays a leading role in any economic recovery. But that hasn't been the case in the aftermath of the U.S. financial crisis of 2008.
"It's has been a negative factor in this recovery -- or lack of recovery," housing economist and consultant Michael Carliner said.
Generally, when interest rates go down, that spurs the mortgage and housing markets and helps move the economy in the right direction. But that hasn't happened this time around, said Carliner, a former economist for the National Association of Home Builders. "We have lowest mortgage rates since the early 1950s and it's not doing anything," he said.
Interest rates on 30-year fixed rate mortgages averaged 4.39 percent for the week ending Aug. 4, according to a survey by mortgage giant Freddie Mac.
What's holding back the housing market, Carliner said, is a glut of available homes for sale, due in part to overbuilding during the housing boom and to continuing foreclosure woes. An "excess inventory" of perhaps 2 million homes is making it hard for the housing market to get going again, he said.