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Federal Reserve Bank of Atlanta President and CEO Dennis Lockhart predicted that problems in the housing markets will continue through this year, although he insisted that economic recovery will proceed.

In comments originally prepared for a speech before the Rotary Club of Atlanta - which wound up being cancelled due to severe inclement weather in the city - Lockhart noted that the housing market faces four primary obstacles that prevent a more robust recovery.

"These are stricter mortgage underwriting standards, foreclosures continuing at a high level, elevated inventories of unsold homes, and slow employment and income growth," he said. "The direction of home prices will depend, to a large degree, on the future flow of foreclosures. There are currently about 5 million mortgages either in some stage of foreclosure or seriously delinquent. Nearly all of them may enter the market as distressed sales over the next year or two, adding to the already high inventory of homes on the market and putting downward pressure on prices and values."

Lockhart also noted that "about 22 percent of residential properties with mortgages are underwater," which could lead to an "elevated" level of defaults and foreclosures. He expected more bank failure this year, along with continued challenges for the secondary market and credit markets.

"Securitization markets have made a comeback since their near shutdown during the crisis, but issuance is well below pre-crisis levels. Overall, credit markets have come a long way since the fall of 2008, but the credit system is not back to full health and must adapt to a new regulatory landscape," he added.

However, Lockhart anticipated a better economic environment in the coming months.

"The results of the November elections clarify which party will control the House and shape, in part, the national agenda," he said. "The extension of the Bush-era tax cuts allows at least short-term expenditure planning. Passage of the Dodd-Frank Act eases some financial regulatory uncertainty as we move to the next phase of implementation and rule writing. And the accumulating strength of the economy has given us glimpses of clearer skies ahead."

SOURCE: Federal Reserve Bank of Atlanta

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