In recent Senate comments, Federal Reserve Governor Elizabeth A. Duke said that "the failure of the housing market to respond to lower interest rates as vigorously as it has in the past indicates that factors other than financial conditions may be restraining improvement in mortgage credit and housing market conditions." She is absolutely correct. Aside from the overhang of problem loans, housing remains weak because dislocations in the primary mortgage market have limited the availability of mortgage funds. Unless mortgage lending moves to a stronger footing and can better serve the broad housing market, home prices will remain under pressure.

The mortgage industry is currently faced with a series of unprecedented challenges. As widely reported, a number of large players in mortgages have drastically scaled back their involvement in the sector. Bank of America withdrew entirely from the correspondent lending channel in 2011; other major players, including GMAC and Citi, have also scaled back their presence. This has led to fears that smaller lenders dependent on the correspondent channel will have limited options for selling their loan production. (Frankly, regulators should be alarmed at the rapid pace of consolidation in the mortgage market; the increased concentration of the industry has created a new variation on "systemic risk.")

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