Full Housing Crisis Effect Yet To Be Felt: Economist
The full effect of the housing crisis has not yet been felt because foreclosures are not happening fast enough, John Geanakoplos, a partner at Ellington Capital Management, told CNBC Wednesday.
One of the remedies for the crisis would have been to write down the principal on troubled mortgages, as many houses get destroyed and lose value between the time the owners are notified they will be foreclosed and the time they leave, Geanakoplos said.
But mortgage loans that are securitized, especially the subprime ones, are not owned directly by issuers but by servicers -- separate companies owned by the big banks -- and this makes things more complicated, he added.
"I think we haven't seen the full effect of (the housing crisis) yet, because the servicers are not foreclosing that fast on homeowners… they realized they can leave these people in houses for a while, not paying," Geanakoplos told "Squawk Box."
"The servicers don't own the mortgages, they have no interest in cutting down the principals," he explained.
The troubled loans' outstanding balance is around $700 billion, there are many subprime loans and the homeowners will just give up on the mortgages as they will go deeper and deeper under water, according to Geanakoplos.
"Almost all of these people are going to end up defaulting and being thrown out of their homes," he said.
The fact that the government is not writing down the principal on troubled mortgages is a "bad move," Geanakoplos also said.
"The FHA (Federal Housing Administration) is giving out loans at 3.5 percent - we're repeating the same mistakes," he added.