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Foreclosures, along with unemployment, are a plague that continues to bedevil the economy. The problem has caused the collapse of Fannie Mae and Freddie Mac, which could eventually cost taxpayers more than a half a trillion dollars. The housing problem was also a major contributor to the credit crisis. And, beyond foreclosures, a drop of home prices, which exceeds 40% in some markets, has stripped away trillions of dollars in consumer net worth which has left millions of Americans without any equity left in what was once their primary asset.

One of the governors of the Federal Reserve, Sarah Bloom Raskin, says the worst is not over.

“Our projections remain very grim for the foreseeable future: All told, we expect about two and one-quarter million foreclosure filings this year and again next year, and about two million more in 2012.”

Raskin goes on to describe the issues with “robo-signing”, the tension between mortgage holders and mortgage services, and the drop of home prices on consumer activity and retirement. But, she offers no concrete solutions

The comments do point to the possibility a much longer and deeper period of slow economic growth and a possible double dip recession. Many economists believe that the mortgage and housing markets will recover next year, perhaps rapidly. If that does not happen, the problem, coupled with unemployment, which could remain above 9% for another several quarters, could kill any move up in GDP growth. Real estate prices, which were a critical engine of consumer spending are not any longer. The day of home equity loans is long gone. It has been replaced by a period in which more than 11 million home mortgages are underwater and where many people believe that their home will always be worth less than the mortgages on them.

Fed governors and regional presidents have already began to publicly break with Ben Bernanke on QE2. Some of the same officials have also begun to paint a picture of the economy which is worse than the Fed’s party line. Sarah Bloom Raskin’s analysis of the foreclosure situation is another break with Bernanke and puts his analysis of the future of the economy further under siege by his own peers.

Important voices within the body of the Fed are now at war with one another about the state of an economic recovery that seemed so promising at mid-year.

Douglas A. McIntyre