New York Fed President William Dudley stressed the need to take forceful action to aid the real estate market, which has been a drag on the economy, but stopped short of offering a silver bullet solution, in a speech before the New Jersey Bankers Association Friday.
"Improving such policies would improve the economic outlook and make monetary accommodation more effective,” Dudley said. His comments echoed similar calls that Federal Reserve Board Gov. Elizabeth Duke made in a
The challenge that has faced policymakers has been in deciding what role, if any, the government will play in housing finance and how to wind down Fannie Mae and Freddie Mac, which were taken into conservatorship in September 2008.
But the lack of a housing finance plan and continued weakness in the housing market has impeded efforts by the Fed to improve the economy—a significant concern for central bank officials given the vital role housing has played in past recoveries.
Even with some slight improvements, housing demand and homebuilding continues to be restrained by weak income and sentiment coupled with tight lending standards and a large overhang of vacant properties on the market.
The Fed has already taken steps to reduce mortgage rates by buying longer-term assets, particularly through the purchase of agency mortgage-backed securities.
Typically, low rates combined with falling house prices have contributed to historically high levels of housing affordability. Rents, which have also been rising, should also make homeownership a more attractive option. But, thus far, that hasn't been the case.
The incongruity helps explain why Fed officials have become much more outspoken that policymakers take certain steps to help ease the strain on the housing market to help at least one impediment on the economy.
Last week, the Fed released a white paper outlining areas where policymakers could take action to ease some of the pressures of the housing market, including policies that would help moderate the inflow of properties into the larger inventory of unsold homes, improve creditworthy borrowers access to mortgage credit, and limit the number of homeowners who end up in foreclosure pipelines.
The Fed was forthright in saying that it was not providing a detailed blueprint, but rather outlining issues and tradeoffs policymakers could weigh as they move ahead.
For his part, Dudley endorsed a comprehensive approach to stabilize the housing market, including improving access to mortgage credit, accelerating principle reduction, and expanding bridge financing to lessen foreclosures -- largely aligned with the Fed's white paper.
Many households have been unable to buy home because of mortgage credit conditions, which are tighter than they were before the recession.
Dudley said more could be done by policymakers in terms of helping homeowners tap into government refinancing programs. He also endorsed extending a bridge funding program for "all qualified borrowers with demonstrated ability to service their debts who become unemployed involuntarily" to help prevent foreclosures.
In addition, Dudley endorsed use of principle reductions. Dudley argued that just like investment firms buy delinquent mortgages whose principles are regularly reduced to maximize value on these loans, Fannie and Freddie should be able to do this as well to minimize loss of value on the delinquent loans they guarantee.
Dudley also took aim at criticisms that any intervention by policymakers to aid the housing market would lead to moral hazard.
"I think these concerns are overstated," said Dudley. "The programs that have been proposed can be designed with the proper incentives to limit moral hazard and to encourage desirable behavior."
