Federal Reserve Issues Housing Market White Paper

According to the Federal Reserve Board, “There has been much discussion about the pathway forward, and the Federal Reserve has received questions and requests for input and assistance.” As a result the recently published a white paper, “The U.S. Housing Market: Current Conditions and Policy Considerations,” in which they call for increased lending to creditworthy homebuyers, a seeming no-brainer. They also recommend more loan modifications, mortgage re-financings and short sales to reduce the rising inventory of foreclosed homes and help stabilize the housing industry.

By all measurements these seem like reasonable and obvious solutions. Improving access to affordable mortgage financing for qualified homebuyers and investors, while aggressively pursuing more loan modifications and short sales would help reenergize the housing market and spur an economic recovery.”

 I think the same things were said by some local kindergarteners.

The Fed white paper says the current problem with mortgage credit “reflects not only a correction of the unsound underwriting practices that emerged over the past decade, but also a more substantial shift in lenders’ … willingness to bear risk.” However, the Fed says that fixing the current real estate market must not simultaneously repeat the mistakes of the past. I’m baffled as to why they feel the need to re-state the obvious. These are supposed to be some of our best economic minds and they sound like we’re in pre-school.

I agree that banks could prevent further foreclosure inventory increases, by more aggressively modifying loans and keep struggling families in their homes. But the flip side is what happens to the lost equity. Who eats it? Someone has to take it on the chin. Either the lender, the borrower or the tax-payer. I still think the silent second approach while tough on the borrower, will at least help lower their current payment, maintain some cash flow for the lender and promote a recovery and eventual strengthening of values and prices.

Where the Fed paper really goes astray is when it suggests converting foreclosed properties into affordable rentals. Worse yet, there is a hint that banks could actually become landlords. Hasn’t the current economic crisis demonstrated, if nothing else, that banks need to focus on their existing lines of business rather than leaping into yet more unchartered waters from which the taxpayer will have to save them? If you haven’t seen the HBO movie Too Big to Fail, I suggest you find a way to see it!

While it would be nice if banks made it easier for owner-occupants and small investors to get financing, the proposed bulk sales of distressed properties, lead to greater losses for taxpayers and a negative impact on housing values in markets across the country.

“Restoring the health of the housing market is a necessary part of a broader strategy for economic recovery,” the Fed’s white paper concludes. “There is unfortunately no single solution for the problems the housing market faces. Instead, progress will come only through persistent and careful efforts to address a range of difficult and interdependent issues.”

Until the banks are held accountable for their actions, rather than being protected by a taxpayer safety net, there is no way they should become landlords or property managers. This could easily make things in our nation much worse. As for the Fed, shouldn’t it make more sense for them to focus on monetary policy, the task for which our tax dollars pay them rather than jumping on the housing band wagon? Housing policy seems to me to be well beyond the scope of its charter.

Since it is your tax dollars paying their salaries; should the Fed be making or even commenting on housing policy? What do you think?