FED Issues White Paper on Housing Market and Related Policy Considerations

Date Published 1/10/2012
Author Marja Hoek-Smit
Country United States

January 6, 2012

On January 4, 2012, Federal Reserve Chairman Ben S. Bernanke sent a report entitled “The U.S. Housing Market: Current Conditions and Policy Considerations” to leaders of the Senate Banking, Housing and Urban Affairs Committee. The white paper and accompanying letter called the continued weakness in the housing market a “significant barrier” to U.S. economic health that would have to be addressed as “a necessary part of a broader strategy for economic recovery”. It provides a framework for thinking about directions and trade-offs policymakers may consider to restore health to the housing market.

Specifically, it proposes actions that may expose Fannie Mae and Freddie Mac to greater credit risk and near-term losses, but might be in the interest of taxpayers “if those actions result in a quicker and more vigorous economic recovery.” The government-sponsored enterprises (GSEs) hold or guarantee significant shares of delinquent mortgages and foreclosed properties and their actions affect therefore not only their own portfolios, but the housing market overall. Proposals focus on three main areas:

-Actions aimed at foreclosed properties that are owned by financial institutions such as GSEs or banks. The study suggests that a government-facilitated Real Estate-Owned (REO)-to-Rental program for GSEs that relies on sales to third-party investors—even if such sales have a lower level of recoveries than sales to owner occupants—may improve loss recoveries on REO portfolios overall, and stimulate housing market development. It may trigger similar programs in the private sector.

-Actions aimed at homeowners at risk of default or foreclosure. The study proposes further adjustments to the current Home Affordable Refinance Program (HARP) to increase participation rates. It further suggests its expansion to non-GSE, non-FHA loans that would otherwise be eligible for the HARP program. For mortgages that are not-eligible for refinancing because they are already delinquent or have been sufficiently delinquent in the past, the report suggests changes to the current Home Affordable Modification Program (HAMP) that provides incentives to lenders, servicers and borrowers to facilitate loan modifications. Suggestions include allowing lower debt-to-income ratios and including a broader set of borrower expenses in the DTI equation and including payment deferral options for unemployed borrowers; focusing on reducing payments for underwater borrowers who are current rather than reducing principle per se. In cases where foreclosure is inevitable, alternative solutions such as short sale or deed-in-lieu of foreclosure may be considered.

-Ideas for improving mortgage servicing practices. The study proposes changes in the standard servicing compensation model that would allow for differentiation according to actual costs across performing and delinquent loans and the creation of an on-line standardized registry of liens to improve information on housing debt.

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