The Federal Reserve tried Wednesday to stir interest among policy makers in the problems afflicting the housing market, sending a white paper to Congress outlining suggestions for easing those problems.
The paper makes two basic points:
1. There are no silver bullets.
2. It certainly would be helpful if Fannie Mae and Freddie Mac, which are controlled by the government, gave the health of the housing market greater priority than their own short-term financial condition.
The Fed is concerned that the collapse of mortgage lending during the financial crisis is hardening into “a potentially long-term downshift in the supply of mortgage credit.” One reason for this, the paper says, is that Fannie and Freddie, which provide the money for most mortgage loans, are scaring lenders by aggressively seeking refunds on defaulted loans.
The policy helps Fannie and Freddie “maximize their profits on old business and thus limits draws on the U.S. Treasury, but at the same time, it discourages lenders from originating new mortgages,” the
paper says.
In a similar vein, the paper says that Fannie and Freddie — known as government-sponsored enterprises, or G.S.E.’s — have pushed to resell foreclosed properties
even when converting properties into rental units makes more sense. The paper calculates that for two-fifths of the properties owned by Fannie Mae, renting could actually reduce its losses.
The paper also gives a tepid review of recent changes to the Home Affordable Refinance Program, which seeks to help homeowners refinance into more affordable loans, noting that “more might be done.”
“The structure of the HARP program highlights the tension between minimizing the G.S.E.’s’ exposure to potential losses and stabilizing the housing market,” said the paper, which was delivered Wednesday to the chairman and ranking member of the Senate Banking Committee.
The Federal Housing Finance Agency, which has guardianship of Fannie and Freddie, has said repeatedly that it is required by law to minimize their losses, which are borne by taxpayers and already exceed $150 billion. The paper suggests this mandate could be interpreted more broadly, as “some actions that cause greater losses to be sustained by the G.S.E.’s in the near term might be in the interest of taxpayers” in the long term. It does not take the other road of calling for Congress to change the law.
Indeed, the overall tone of the paper is cautious, playing down, for example, the potential benefits of principal reductions for owners whose mortgage debts exceed the value of their homes. In this sense, it falls solidly in line with the conventional wisdom in Washington that policy makers lack the power to lift the housing market from its deep depression.
“There is unfortunately no single solution for the problems the housing market faces,” the paper concludes. “Instead, progress will come only through persistent and careful efforts to address a range of difficult and interdependent issues.”
Just the kind of work that Congress is equipped to handle.