- 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.

Consumers stuck with unnecessarily high debt-service payments cannot free up the cash they need for spending on other things, blocking an important mechanism that in the past helped the economy recover from recessions.

“Easing some of these obstacles could contribute to the gradual recovery in housing markets and thus help speed the overall economic recovery,” the staff paper says. “Some actions that cause greater losses” at Fannie Mae and Freddie Mac — such as an easing of their “putback” policy on defaulted loans — might still “be in the interest of taxpayers if those actions result in a quicker and more-vigorous economic recovery.”

Governors’ ideas

Elizabeth Duke, a Fed governor, last week blamed the housing debacle on credit standards that swung from being too loose during the housing boom to being too tight today as the mortgage industry reacted to escalating defaults.

“Stricter underwriting, higher fees and interest rates, more stringent documentation requirements, larger required down payments, stricter appraisal standards and few available mortgage products” are holding back housing and the economy, she said.

William Dudley, president of the Federal Reserve Bank of New York, warned that the number of foreclosures could nearly double in the next two years, posing a dead weight on the economy and housing market, without more aggressive federal intervention.

He advocated low-cost, streamlined refinancings for all borrowers who have good credit and are current on their loans, a $15 billion “bridge loan” program to help jobless homeowners avoid default, and earned principal reduction for diligent borrowers, among other proposals to break the logjam in housing.

“A more robust housing market matters for the wider economy,” he told New Jersey bankers on Jan. 6. Further federal aid for homeowners will “support growth and make monetary policy more effective.”

While many legislators focus on the costs to taxpayers, Mr. Dudley, a former Goldman Sachs Group Inc. executive, argued that despite some added losses, his proposals are “strongly in the public interest” because taxpayers would benefit greatly from an improved economic performance that generates more jobs and income.

Political reaction

While many Democrats applauded the recommendations, several Republicans in Congress expressed outrage at the Fed’s increased activism on housing. Republicans generally blame Fannie and Freddie for helping to create the housing crisis and oppose getting them further involved in a housing rescue.

Sen. Bob Corker, Tennessee Republican, took offense at Mr. Dudley’s proposal for Fannie and Freddie to reduce principal on some loans that are underwater.

“Reducing the principal on home loans for borrowers who put no money down amounts to a massive wealth transfer from places like Tennessee, where most homeowners have borrowed responsibly, to places like California and New York, where exotic mortgages were widely used to finance a speculative housing boom,” Mr. Corker said. “It is absolutely egregious that the Federal Reserve would insert itself in this manner.”

Sen. Orrin G. Hatch, Utah Republican, said the Fed was “out of bounds” and overstepping its authority in suggesting ways for Congress to spend federal money.

“I share your frustration over the painful adjustments taking place in the housing and housing-finance markets following the bursting of the housing bubble,” he said in a letter to Mr. Bernanke. But he warned that “any hint of activism” on the Fed’s part could jeopardize the central bank’s traditional independence in dealings with Congress.

Some prominent Republicans have endorsed the idea of mass refinancings for underwater homeowners, however. Glenn Hubbard, the George W. Bush White House’s chief economist, said such a measure would bring average mortgage relief of $3,200 a year to as many as 13 million households and flood the economy with $40 billion a year in extra cash and spending by consumers who take advantage of the program. Economists say that would provide a powerful shot in the arm to the economy.

Administration role

Caught in between is President Obama.

His administration did not comment on the Fed’s ideas, though Mr. Obama has said he regretted not doing more to help the stressed housing market. In recent months, federal agencies have floated limited proposals to modify loans and streamline refinancings like the Fed recommended.

The administration has been hobbled by its inability to get Senate confirmation for key appointees, including a new head of the Federal Housing Finance Agency, the agency that oversees Fannie and Freddie. But the White House is divided on what to do, as it has echoed Republicans’ call for winding down and eventually eliminating Fannie and Freddie.

Analysts say many of the Fed’s ideas could be carried out by executive order should the White House take a potentially controversial stand on housing before Election Day.

Arguing that it would fit with Mr. Obama’s “we can’t wait” campaign of taking steps to aid the economy without waiting for authorization by Congress, House Democrats from California urged Mr. Obama in a letter last week to replace the acting head of the Housing Finance Agency, Ed DeMarco, through a recess appointment, as Mr. Obama recently did with several other high-profile appointees this month.

Mr. DeMarco, reluctant to do anything that would rile Congress and deepen the losses at Fannie and Freddie, has shunned more-aggressive proposals and approved only limited-assistance programs for homeowners.

But Brian Gardner, an analyst at Keefe, Bruyette & Woods, said the administration has struggled to find a new administrator for the Housing Finance Agency since a previous candidate withdrew his nomination, and there is no candidate waiting in the wings to replace Mr. DeMarco. He doubts Mr. Obama will announce any new, high-profile housing programs.

“While there would be some political benefit to replacing DeMarco and rolling out a new mortgage proposal,” the move would “also carry some political risks since it can be argued that any costs to [Fannie and Freddie] are ultimately borne by the taxpayers,” he said.

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