- The Washington Times - Wednesday, January 18, 2012

Top Federal Reserve officials are prodding the White House and Congress to take more aggressive action to stop the free-fall in the housing market, warning that the U.S. economy will remain sluggish and vulnerable and will not fully recover until housing returns to better health.

Having failed to revive the housing market from its deep slump by driving interest rates to record lows and taking the unprecedented step of buying up many of the country’s mortgages, Fed officials have concluded that vigorous action by the executive branch is needed to overcome legal and institutional obstacles to a recovery.

In speeches and staff studies issued since the beginning of the year, the Fed has been urging such ambitious steps as setting up low-cost, streamlined mortgage-refinancing programs for millions of creditworthy borrowers, regardless of whether they have equity in their homes or previous backing from the federal government.

To blunt the impact of an expected deluge of foreclosed properties hitting the housing market and further depressing housing prices this year and next, the Fed says, the government should take advantage of a budding renaissance in the rental-housing market to create programs for investors to easily purchase and rent out thousands of foreclosed properties now owned by banks and the government.

While such steps have been debated in housing circles for months, the Fed’s push for action is touching off controversy in part because most of its recommendations involve using Fannie Mae and Freddie Mac, the giant mortgage agencies taken over by the government in 2008, to carry out the housing assistance programs.

Republican legislators are particularly piqued because the proposals would cause further losses at the agencies over and above the $165 billion already paid out by taxpayers, at least in the short term, at a time when Congress has been single-mindedly focused on limiting the taxpayer bailout of the mortgage giants.

Nevertheless, Fed Chairman Ben S. Bernanke quietly forwarded a staff paper at the beginning of the year offering a dozen or so ideas for jump-starting the housing market, saying he gets many requests from legislators for advice on housing.

“Continued weakness in the housing market poses a significant barrier to a more vigorous economic recovery,” said the paper, which noted that the 33 percent drop in housing prices on average since 2006 has eviscerated the main source of wealth for middle-class households while leaving millions of homeowners “underwater” with loans worth more than their houses.

Even the most diligent borrowers, unable to move or refinance when faced with joblessness or other adversities, are thrown into a dilemma that makes them more prone to default in the future, the Fed argued.

Failed efforts

The central bank is particularly frustrated that many underwater homeowners are unable to take advantage of the extraordinarily low interest rates engineered by the Fed to refinance their higher-rate mortgages because of legal and institutional obstacles — some of them imposed by the government itself.

The 30-year fixed mortgage rate hit another record low last week of 4.06 percent, which touched off a 23 percent jump in applications for mortgages, the Mortgage Bankers Association reported Wednesday.

Fannie Mae and Freddie Mac, which guarantee most prime mortgages on the market, have led the charge in creating obstacles to increased lending, Fed and banking officials say, by recently threatening to force banks to take back and absorb the losses on any defaulted loans that had even small underwriting or documentation defects. This is a principle reason banks say they now hesitate to offer loans and refinancing to people with less than perfect credit.

In past economic recoveries, housing was usually the first sector to recover because the drop in interest rates quickly lured buyers back into the market and touched off major refinancing waves.

But today’s legal and procedural barriers — many of which were erected in the wake of the biggest onslaught of defaults since the Great Depression — have conspired to “blunt the transmission” of the Fed’s low-rate policies to borrowers in the current recovery, the Fed argued.

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