Price tag in mortgage crisis is looking like real money
The mortgage meltdown is taking a rising toll on the broader economy, increasing pressure on the Federal Reserve to slash interest rates for a third time next month in hopes of averting a recession.

Homeowners will see their property values sink by $1.2 trillion next year, and 524,000 fewer jobs will be created -- both a result of the trouble caused by loan defaults and rising foreclosures, according to a report released this week for the U.S. Conference of Mayors.

The fallout is weakening consumer spending, and auto sales next year will be their worst since 1998, according to the study by research firm Global Insight.

Amid widening concern over a sharp economic downturn, Fed Chairman Ben S. Bernanke suggested late Thursday that the central bank was prepared to cut its benchmark interest rate when it meets Dec. 11.

"Needless to say, the Federal Reserve is following the evolution of financial conditions carefully, with particular attention to the question of how strains in financial markets might affect the broader economy," Bernanke said in a speech to the Charlotte, N.C., Chamber of Commerce.

"We at the Federal Reserve will have to remain exceptionally alert and flexible as we continue to assess how best to promote sustainable economic growth," he added.

Bernanke's comments echoed those of Fed Vice Chairman Donald L. Kohn a day earlier, which helped trigger a strong Wall Street rally. Stocks moved higher again Thursday, but some economists caution that the Fed's powers are limited.

Cutting interest rates today wouldn't prevent a recession, because it takes months for businesses and consumers to respond by increasing their borrowing and spending, said Gary Schlossberg, senior economist at Wells Capital Management in San Francisco.

"The Fed might mitigate the slowdown," Schlossberg said, "but at this point if the economy is truly headed for a recession, it would be very difficult for them to stave it off."

The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled sub-prime home loans, the Wall Street Journal reported early today, citing sources familiar with the negotiations.

An agreement could reassure anxious investors and strapped homeowners as interest rates on more than 2 million adjustable-rate mortgages are scheduled to jump over the next two years, according to the report.

The mortgage meltdown began early this year, as home values leveled off and adjustable-rate loans began resetting to higher rates. Many borrowers found themselves unable to make payments or to refinance into more-affordable loans.

The Wall Street banks that provided mortgage loan funding were among the early casualties. Merrill Lynch & Co. reported a $7.9-billion loss, and Citigroup Inc. says it could swallow up to $13 billion in red ink. All told, Wall Street will take a $400-billion hit because of loan defaults, according to one estimate. At least one analyst pegs the damage at nearly $500 billion.

As big as those numbers are, however, they don't begin to cover the broader damage to the economy from loans gone bad.

Real estate agents and loan officers are out of work, of course, but so too are landscapers and swimming-pool contractors.

Retailers are feeling the pain too. As rising defaults and foreclosures push home values down, homeowners are less willing to tap their equity -- if they have any left -- to finance big-ticket purchases, such as new cars and kitchen cabinets.

State and local governments will suffer, too, as revenue from sales and property taxes slows or declines.

Trying to calculate the costs is nearly impossible, economists say, in part because the crisis is still unfolding.

"We know the sub-prime mess is a wet blanket on the economy. But it's next to impossible to come up with any precise estimates of the ultimate job and housing-price impacts," said Ken Mayland, president of ClearView Economics in Pepper Pike, Ohio.