Two senior Federal Reserve officials called on policymakers to take steps quickly to help ease the pain of the housing market to assist ongoing efforts to rescue the U.S. economy.
In two separate speeches, Federal Reserve Board Gov. Elizabeth Duke and New York Fed president William Dudley stressed the need to take forceful action to aid the real estate market, which has been a drag on the economy, but stopped short of offering a silver bullet solution.
“Given the severity of problems with supply and demand in the housing market, it is unlikely that any single policy solution will provide the full answer, but a number of different policies each have the potential to yield incremental improvement in housing and economic recovery,” Duke said in a speech before the Virginia Bankers Association and state Chamber of Commerce.
Dudley, speaking before the New Jersey Bankers Association, echoed those remarks by saying, “Improving such policies would improve the economic outlook and make monetary accommodation more effective.”
The challenge that has faced policymakers has been in deciding what role, if any, the government will play in housing finance and how to wind down Fannie Mae and Freddie Mac, which were taken into conservatorship in September 2008.
But the lack of a housing finance plan and continued weakness in the housing market has impeded efforts by the Fed to improve the economy—a significant concern for central bank officials given the vital role housing has played in past recoveries.
Even with some slight improvements, housing demand and homebuilding continues to be restrained by weak income and sentiment coupled with tight lending standards and a large overhang of vacant properties on the market.
“The housing sector has not contributed to the recovery,” said Duke. “I do believe that forceful and effective housing policies have the potential to significantly influence the speed and strength of our economic recovery.”
The Fed has already taken steps to reduce mortgage rates by buying longer-term assets, particularly through the purchase of agency mortgage-backed securities.
Typically, low rates combined with falling house prices have contributed to historically high levels of housing affordability. Rents, which have also been rising, should also make homeownership a more attractive option.
But, thus far, that hasn't been the case, Duke said.
“The failure of home sales to respond to conditions that would otherwise seem favorable to home purchases indicates that there are other factors weighing on demand for owner-occupied homes,” said Duke. “High levels of unemployment and weak income prospects are likely precluding many households from purchasing homes.”
The incongruity helps explain why Fed officials have become much more outspoken that policymakers take certain steps to help ease the strain on the housing market to help at least one impediment on the economy.
The Fed recently released a white paper outlining areas where policymakers could take action to ease some of the pressures of the housing market, including policies that would help moderate the inflow of properties into the larger inventory of unsold homes, improve creditworthy borrowers access to mortgage credit, and limit the number of homeowners who end up in foreclosure pipelines.
The Fed was forthright in saying that it was not providing a detailed blueprint, but rather outlining issues and tradeoffs policymakers could weigh as they move ahead.
Duke touched on the Fed's paper saying effective implementation of these policies would improve economic performance.
Although there is no miracle here, these actions have the potential to help the economy recuperate more quickly than I currently expect it to, moving us closer to full employment sooner and improving the lives of many Americans,” she said.
For his part, Dudley endorsed a comprehensive approach to stabilize the housing market, including improving access to mortgage credit, accelerating principle reduction, and expanding bridge financing to lessen foreclosures—largely aligned with the Fed's white paper.
Many households have been unable to buy home because of mortgage credit conditions which are tighter than they were before the recession.
While Duke said some tightening is appropriate, “extraordinarily tight standards” partly reflect new obstacles that inhibit lending even to creditworthy borrowers.
“This tightening in mortgage credit can be seen in the increase in the credit scores associated with newly originated prime and Federal Housing Administration mortgage originations, which suggests that borrowers who likely had access to mortgage credit a few years ago are now essentially excluded from the mortgage market,” said Duke.
Both Fed officials agreed more could be done by policymakers in terms of helping homeowners tap into government refinancing programs.
Dudley also endorsed extending a bridge funding program for “all qualified borrowers with demonstrated ability to service their debts who become unemployed involuntarily” to help prevent foreclosures.
He also endorsed use of principle reductions. Dudley argued that just like investment firms buy delinquent mortgages whose principles are regularly reduced to maximize value on these loans, Fannie and Freddie should be able to do this as well to minimize loss of value on the delinquent loans they guarantee.
Duke also suggested policymakers utilize Fannie Mae and Freddie as they try to reach a workable solution.
“In the short term, however, I believe policymakers should at least consider policies that take into account the role the GSEs could play in hastening the healing of the housing market rather than focusing entirely on minimizing losses to the GSEs.”
By doing so, Duke said, it is possible that a faster recovery in housing could “speed, rather than slow, the end of GSE conservatorship.”
Any solution, she said, also must address the problems of the past—weak underwriting, inadequate disclosure, conflicting incentives, incomplete data and uneven infrastructure.
“Private investors are not likely to return to mortgage markets until there are common standards as well as consistency and transparency in both mortgage securitization and mortgage servicing,” said Duke.
She suggested a modernized national lien registry identifying the current servicer of a mortgage and all the liens that encumber the property could increase transparency, and better the quality of mortgage servicing and facilitate loan modifications.
Dudley also took aim at criticisms that any intervention by policymakers to aid the housing market would lead to moral hazard.
“I think these concerns are overstated,” said Dudley. “The programs that have been proposed can be designed with the proper incentives to limit moral hazard and to encourage desirable behavior.”