Fed Takes Aim at Housing
01/06/2012 12:07 pm EST
Its new white paper is a rallying cry for measures to prevent foreclosures and quickly rent out more of the vacant inventory, writes MoneyShow.com senior editor Igor Greenwald.
The stock market is betting that housing has bottomed. It has some valid reasons to think so.
A couple of the key drivers of the housing crash—fraudulent underwriting and massive job losses—took place years ago. In all likelihood, they've already done their worst for home prices.
That still leaves us with the mortgage credit crunch and the pig-in-a-python of pending foreclosures. The latter pose a particular threat to housing recovery, likely adding up to a million residences in each of the next two years to the recent glut of 2 million unsold homes.
That estimate comes from the Federal Reserve, which is supposed to worry about sound banks, sound money, and (ahem) employment. Housing is not on that list. But housing is the arena where the low rates mandated by the Fed can do the most tangible good to the economy, if only that market could be freed from the entanglements of too much bad debt without the colossal waste inherent in the foreclosure process.
The Fed is clearly out of patience with this bottleneck. Fed Chairman Ben Bernanke started the year by presenting a menu of sensible housing measures to Congress.
The newly issued “white paper” is a politely phrased rallying cry for further action, reminding lawmakers that the housing crash wiped out $7 trillion in notional household wealth and half of the aggregate home equity. “Continued weakness in the housing market poses a significant barrier to a more vigorous economic recovery,” Fed staffers noted.
They offered a variety of ideas designed to “help moderate the inflow of properties into the large inventory of unsold homes, remove some of the obstacles preventing creditworthy borrowers from accessing mortgage credit, and limit the number of homeowners who find themselves pushed into an inefficient and overburdened foreclosure pipeline.”
The very fact that the Fed needs to sort such nuts and bolts four years after the bubble burst, and three years after Washington began rolling out measures specifically aimed at bolstering the housing market, is an indictment of Congress, two presidential administrations, and last but not least, Federal Housing Finance Agency acting director Edward DeMarco.
In his capacity as overseer of the insolvent mortgage giants Freddie Mac and Fannie Mae, DeMarco has been a stubborn obstacle to meaningful relief, arguing that his only remit is to protect the taxpayer from further short-term losses. The Fed white paper explain how such short-term focus risks ending up penny-wise but pound-foolish.
It also makes clear that, while DeMarco eased his opposition to restructuring delinquent mortgages a bit this fall, letting the administration offer some incremental relief to struggling homeowners, there’s much more that he can do.
DeMarco is a civil-service economist who spent his career overseeing Fannie and Freddie at various agencies. He’s justified his passivity and short-term fixation by arguing that doing more does not meet “our responsibilities as conservator” and “our mandate.” (But defending multimillion-dollar bonuses for Fannie and Freddie executives is in the job description, apparently.)
DeMarco has resisted White House and Treasury Department pressure to turf him out. The recess appointments recently made by President Obama have raised hopes on the left that DeMarco, too, could soon be answering to a new boss named without the Senate’s consent.
Either way, the Fed has just called him out as someone missing the forest for the trees, and undermining taxpayers’ long-term interests besides, by resisting measures to unclog the mortgage market.
The problem is now crystal clear: millions of American homeowners have become renters in the last few years, driving rents significantly higher after a two-year stall in 2009-2010. At the same time, many of the properties they lost remain vacant because credit is not available to put them in the hands of new landlords.
The same credit crunch has also disqualified millions of Americans from buying the homes made more affordable via the low interest rates, on top of the 12 million homeowners stuck with underwater mortgages. So while demand for rentals has been brisk, the millions of pending foreclosures threaten to do more damage to home prices in the absence of a credit easing and wider restructuring.
The ball is now in Congress’s court, which means another air ball is coming. And then it will be up to Obama and Bernanke to see if they can do an end run around DeMarco and the penny-pinching Republicans whose mindset he has adopted.
If the economy is dragged down by the European recession and slowing growth in Asia, the tentative recent signs of the housing revival could come to naught. And that’s an outcome worth avoiding even at the cost of offending an acting bureaucrat or two and all the hostage-takers in Congress.