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Federal Reserve official sees ‘lost decade’ in Mississippi

The crowd gathered at the University Club in Jackson received a dose of good news and bad news June 25 at a meeting of the Mississippi Economic Forum (MEF).

The good news: Although it is feeling the shockwaves of the subprime mortgage collapse, Mississippi’s housing economy is holding steady. The bad news: The state has just wrapped up what one official from the Federal Reserve Bank in St. Louis called “a lost decade.”

William Emmons and Julie Stackhouse, both of the St. Louis branch of the Federal Reserve, were the keynote speakers at the MEF function and offered what Emmons termed “an outsider’s perspective” on how the subprime situation is hitting the state and the overall health of the state’s economy.

‘Lost decade’

Emmons pointed to data from the Office of Federal Enterprise Oversight and the census bureau that showed the state’s employment rate has leveled off the past 10 years, compared with moderate growth in the 1980s and ‘90s. Couple that with the state’s rising poverty level, stagnant per capita income and lingering effects from Hurricane Katrina, and Emmons said, statistically speaking, Mississippi’s economic health has been in decline since the turn of the century.

“It’s been a lost decade in terms of making progress in some dimensions,” Emmons said.

Unemployment claims that rise along with poverty rates are symptoms of a slowing economy and are not unique to Mississippi.

“It’s a symptom of the middle class squeeze,” Emmons said.

Those economic factors were exacerbated by the subprime market’s cave that started last August.

“The subprime market grew very, very rapidly,” Stackhouse said, aided by weak borrowers — those with less than ideal credit — who took out mortgages from nontraditional lenders like wholesalers and brokers and not community banks and savings and loans. The lenders who packaged and sold the mortgages piled on to the problem. Because those lenders did not have a personal relationship with the borrowers, they were more than willing to “dump and run,” Stackhouse said. “Most of these originators were not the community banks.”

Too many homebuyers took out adjustable rate mortgages — mortgages whose monthly payment ballooned a few years in — and borrowers found themselves unable to pay their house note. And lenders were too lax in their checks of borrowers, not requiring thorough documentation of income before cutting a check. That led to record numbers of foreclosures that killed the median price of homes and left too many homeowners with mortgage balances that far exceeded the value of their homes. That slowed new construction, wiping out jobs and hammering businesses that supplied contractors.

“No part of the United States escaped the subprime market,” Stackhouse said, who singled out low-documentation loans as a serious no-no for lenders. “Validating a borrower’s income is one of the fundamentals of good underwriting.”

Silver lining in state?

But there is a silver lining, Stackhouse and Emmons agree. Because Mississippi’s housing market did not experience the tremendous growth like markets in Florida and Las Vegas and areas of the West Coast, there was less chance of an outright crisis here.

“When you’re not part of the boom, you’re not going to get hit as hard by the bust,” Stackhouse said.

Emmons called Mississippi the nation’s leader in home affordability and said the state had dodged the worst of the national housing bubble. The state’s banks remain profitable and maintain good loan quality.

“(Housing affordability) is attractive to employers,” he said. “That will pique the interest of foreign and domestic investors. I know there are a lot of people who a couple of years ago said, ‘I really wish I was in Florida because my house would make me rich.’ But be glad you’re not Florida, because (that housing market) is a total disaster.”

The Mississippi Economic Forum is a joint venture of the John C. Stennis Institute of Government at Mississippi State University and MSU’s College of Business. For information about upcoming meetings, call Philip Pierce at (601) 906-5501.

Contact MBJ staff writer Clay Chandler at clay.chandler@ msbusiness.com .

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