Bernanke to Congress: We Need Your Help to Revive Housing
Federal Reserve Chairman Ben Bernanke is urging Congress and the White House to consider steps with short-term costs for taxpayers to aid in the housing recovery as he signals his own willingness to double down on the central bank’s failed three-year bet to revive the housing market.
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The value of U.S. housing has fallen 4.1 percent since the Fed began buying $1.25 trillion of mortgage bonds in January 2009, and is down 32 percent from its peak in 2006, according to an S&P/Case-Shiller index. This year, the central bank is poised to buy about $200 billion, or more than 20 percent of new loans, but some Fed officials have said they support expanding loan purchases. Barclays estimates loan purchases could total as much as $750 billion in 2012.
However, even as Bernanke and fellow Fed officials consider expanding their own efforts to revitalize the housing market, they recognize their own limitations, and acknowledge their inability to turn around housing without help from the rest of the government. In a study he sent to Congress last week, Bernanke said the broader recovery is dependent upon improving the housing market, which represents 15 percent of the U.S. economy.
Despite record low interest rates, home-loan borrowing in 2012 is forecast to decline to the least in 15 years as stricter lending standards coupled with tumbling housing values discourage would-be applicants.
Bernanke’s report urges lawmakers and President Barack Obama’s administration to consider steps with short-term costs to buoy housing, such as widening the role of Fannie Mae and Freddie Mac. Federal Reserve Bank of New York President William Dudley has called on the government to remove obstacles to refinancing.
Eric Rosengren, president of the Boston Fed, supports buying more mortgage-backed securities, a move for which San Francisco Fed President John Williams sees a “strong case,” though the central bank’s purchases of mortgage bonds with record low yields is increasing the risk of eventual losses for the Fed.
Whatever the eventual solution, Bernanke and his colleagues recognize that monetary policy alone hasn’t been enough to prevent housing prices from continuing their downward spiral. An S&P/Case-Shiller index of property values in 20 major U.S.cities dropped 3.4 percent in the year through October, while existing home sales remained 18 percent below their 10-year average.
Housing’s share of the gross domestic product, including household-related spending such as utilities and rent, declined to 15 percent in the third quarter from 18.6 percent in 2005. The Mortgage Bankers Association estimates that home-loan originations declined last year to an 11-year low of $1.3 trillion, and will fall to $968 billion this year, the least since 1997.
Fearful that Fannie and Freddie may force them to repurchase debt if there’s an underwriting error or delinquencies has lenders avoiding making risky loans for government programs, and tightening credit is hurting potential first-time buyers in particular. Only about 85 percent of lenders are offering loans eligible for guarantees by Fannie Mae and Freddie Mac to borrowers with 680 credit scores and 10 percent downpayments, and fewer than 50 percent are making loans in the companies’ lower credit tier.
Furthermore, many creditworthy borrowers are being rejected because of minor blemishes or documentation challenges as lenders seek to protect themselves from risk. Refinancing has also slowed because roughly a quarter of homeowners with mortgages owe more than their properties are worth.
Obama’s three-year-old Home Affordable Refinance Program for Fannie and Freddie loans with little or no home equity is being expanded to cut down on lender risks, lowering fees and allowing borrowers to refinance no matter how much their home’s value has dropped. But Bernanke’s study said “more might be done.”
Bernanke suggests eliminating entirely the reduced fees for risk loans, “more comprehensively” cutting lenders’ put-back risks, further streamlining refinancing for Fannie and Freddie borrowers, and having the two government-controlled mortgage brokers refinance loans not already backed by the government.
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