Although housing policy is generally outside the Fed’s scope, its chairman has raised concern over the beleaguered home market and has called for Congress and policy makers to approach the dilemma more aggressively.
With housing showing little improvement, the Fed calls for Congress and policy makers to act.
Specifically, the Fed is warning that tight mortgage-lending standards threaten to hold back the economy. More extensive use of Fannie and Freddie is also being recommended in order to support a housing recovery. The Federal Housing Finance Agency (FHFA) has been charged with limiting the losses of both firms, and has done so with a strict interpretation of that duty.
The Fed, while acknowledging the pressures faced by the FHFA, contends that even if larger losses are sustained by the firms in the short run, taxpayers may be better served if aggressive action leads to a quicker economic rebound.
The lax standards that existed during the housing boom led to the need for tightening, but the Fed believes that mortgage lending standards have become restrictively tight to the point of harming the housing market and the economy altogether.
Lenders, however, are concerned about being required to repurchase loans they sell to Fannie and Freddie if those mortgages later default. The two firms have increased the number of put-backs to reduce the amount of money they must borrow from taxpayers, but that discourages new lending.
The Fed backs converting foreclosed sing-family homes into rental in order to curtail the decline in home values. Although housing is at near record-lows for the past decade in many areas, prices could further drop as banks unload thousands of foreclosed properties in the coming year. As a result, the FHFA and the Administration are looking at ways to reduce the backlog by selling them to investors to rent out.