Monthly Archives: January 2012

Fed Up with the State of Housing

From the Wall Street Journal, news about a Federal Reserve report that explains the current home mortgage problems and provides some ideas for resolution.  For example, provide some debt repayment relief to homeowners.  Or, let banks get into the rental business.

If they start handing out checks to people who own homes, Robert will be first in line . . .

Here’s the white paper.  Some good charts and info. 

http://online.wsj.com/article/SB10001424052970204331304577144934187722016.html?mod=rss_markets_main

Fed Up with the State of Housing

By DAVID REILLY

For an institution that jealously guards its independence, the Federal Reserve is wading into treacherous political waters.
With the economic rebound still mediocre at best, the Fed is charging into the housing debate. But in doing so, it runs the risk of politicizing itself, while also sending mixed signals to banks still trying to find their postcrisis feet.

There is only so much the Fed can do..

The latest effort was a housing “white paper” sent this week to Congress, along with a series of comments from Fed officials about the importance of housing to the economic recovery. In this, the Fed may be laying the groundwork for further quantitative easing, this time purchasing mortgage securities. But its paper went beyond even the Fed’s already unconventional policies. This included ideas that might require more taxpayer funding through Fannie Mae and Freddie Mac.

But having broached the thorny issue of using government entities to boost housing, the Fed didn’t touch on questions surrounding a needed long-term revamp of housing finance. This left the Fed implicitly endorsing the housing status quo: a market that is almost completely dependent on the government and, in particular, Fannie and Freddie. Whether the government should be involved in housing, or to what degree, is of course a highly contentious political question for Congress.

The Fed’s paper suggested it may be worth pursuing more aggressive actions in terms of loan modifications, mortgage refinancing and sales of foreclosed properties even if they cause greater short-term losses at Fannie and Freddie, and so by extension to taxpayers. And the paper may have led some in markets to believe a new, government housing effort was coming. The Fed’s paper said a possible policy option would be for the government to expand existing refinancing efforts “or introduce a new program.”

Expectations of such action helped spark a nearly 8% rally in Bank of America shares Thursday, although nothing is reportedly planned. Still, the reaction shows many now see the Fed and White House potentially acting together. That underscores how perceptions of Fed independence have already been eroded.

Beyond Fannie and Freddie, the Fed’s paper also took it into other politically charged areas, such as principal forgiveness for underwater mortgage holders. While it didn’t specifically endorse such a move, the Fed said that “policy experiments in this area would be useful.”

Meanwhile on mortgage modifications, the Fed noted certain types of loan changes “may be socially beneficial, even if not in the best interest of the lender.” It went on to acknowledge that this would be “likely to involve additional taxpayer funding, the overriding of private contract rights, or both.” While the paper noted this raises difficult public-policy issues, by simply raising the possibility the Fed risks being seen as supporting such an outcome.

The paper also signaled that the Fed, ostensibly the most important bank regulator, will try to involve banks more directly in housing-revival approaches, even as it imposes new, more stringent regulatory constraints. One area involves efforts to turn foreclosed homes into rental properties. While this primarily pertains to Fannie and Freddie, the Fed noted that commercial banks as of last September had $10 billion in foreclosed homes on their books.

Banking regulations typically direct banks to sell foreclosed homes quickly, although the rules do recognize this isn’t always practical and so these properties can be held up to five years. The Fed said it is now “contemplating issuing guidance” to banks and regulators that would possibly allow banks to turn some of these foreclosed homes into rental properties.

The hope is this may help stanch the flow of foreclosed properties into markets, although the effect may not be that great. Goldman Sachs economists noted Thursday that a rental effort may add 0.5% to home-price appreciation in the first year and 1% the second, although the impact “would likely be smaller.” For banks, a move into the rental business would potentially clog parts of their balance sheets, while requiring them to essentially bet on house prices rebounding.

Housing is indeed important to the economy. But the Fed has to recognize there is only so much it can, or should, do.

Fed Up with the State of Housing

From the Wall Street Journal, news about a Federal Reserve report that explains the current home mortgage problems and provides some ideas for resolution.  For example, provide some debt repayment relief to homeowners.  Or, let banks get into the rental business.

If they start handing out checks to people who own homes, Robert will be first in line . . .

Here’s the white paper.  Some good charts and info. 

http://online.wsj.com/article/SB10001424052970204331304577144934187722016.html?mod=rss_markets_main

Fed Up with the State of Housing

By DAVID REILLY

For an institution that jealously guards its independence, the Federal Reserve is wading into treacherous political waters.
With the economic rebound still mediocre at best, the Fed is charging into the housing debate. But in doing so, it runs the risk of politicizing itself, while also sending mixed signals to banks still trying to find their postcrisis feet.

There is only so much the Fed can do..

The latest effort was a housing “white paper” sent this week to Congress, along with a series of comments from Fed officials about the importance of housing to the economic recovery. In this, the Fed may be laying the groundwork for further quantitative easing, this time purchasing mortgage securities. But its paper went beyond even the Fed’s already unconventional policies. This included ideas that might require more taxpayer funding through Fannie Mae and Freddie Mac.

But having broached the thorny issue of using government entities to boost housing, the Fed didn’t touch on questions surrounding a needed long-term revamp of housing finance. This left the Fed implicitly endorsing the housing status quo: a market that is almost completely dependent on the government and, in particular, Fannie and Freddie. Whether the government should be involved in housing, or to what degree, is of course a highly contentious political question for Congress.

The Fed’s paper suggested it may be worth pursuing more aggressive actions in terms of loan modifications, mortgage refinancing and sales of foreclosed properties even if they cause greater short-term losses at Fannie and Freddie, and so by extension to taxpayers. And the paper may have led some in markets to believe a new, government housing effort was coming. The Fed’s paper said a possible policy option would be for the government to expand existing refinancing efforts “or introduce a new program.”

Expectations of such action helped spark a nearly 8% rally in Bank of America shares Thursday, although nothing is reportedly planned. Still, the reaction shows many now see the Fed and White House potentially acting together. That underscores how perceptions of Fed independence have already been eroded.

Beyond Fannie and Freddie, the Fed’s paper also took it into other politically charged areas, such as principal forgiveness for underwater mortgage holders. While it didn’t specifically endorse such a move, the Fed said that “policy experiments in this area would be useful.”

Meanwhile on mortgage modifications, the Fed noted certain types of loan changes “may be socially beneficial, even if not in the best interest of the lender.” It went on to acknowledge that this would be “likely to involve additional taxpayer funding, the overriding of private contract rights, or both.” While the paper noted this raises difficult public-policy issues, by simply raising the possibility the Fed risks being seen as supporting such an outcome.

The paper also signaled that the Fed, ostensibly the most important bank regulator, will try to involve banks more directly in housing-revival approaches, even as it imposes new, more stringent regulatory constraints. One area involves efforts to turn foreclosed homes into rental properties. While this primarily pertains to Fannie and Freddie, the Fed noted that commercial banks as of last September had $10 billion in foreclosed homes on their books.

Banking regulations typically direct banks to sell foreclosed homes quickly, although the rules do recognize this isn’t always practical and so these properties can be held up to five years. The Fed said it is now “contemplating issuing guidance” to banks and regulators that would possibly allow banks to turn some of these foreclosed homes into rental properties.

The hope is this may help stanch the flow of foreclosed properties into markets, although the effect may not be that great. Goldman Sachs economists noted Thursday that a rental effort may add 0.5% to home-price appreciation in the first year and 1% the second, although the impact “would likely be smaller.” For banks, a move into the rental business would potentially clog parts of their balance sheets, while requiring them to essentially bet on house prices rebounding.

Housing is indeed important to the economy. But the Fed has to recognize there is only so much it can, or should, do.