U.S. Housing Crisis Development

The U.S. Federal Reserve urges Congress to take action.

Since the bubble began bursting on the U.S. housing market, $7 trillion in home equity has disappeared. Property values have declined 33 percent since 2006, and 25 percent of Americans now owe more on their mortgages than their houses are worth.

In mid-2011, the U.S. Federal Reserve established a task force to try to come up with solutions to the housing crisis, and on January 4 of this year, their conclusions were presented in a white paper to congressional committees, urging them to rethink what actions can be taken to work toward fixing the problem.

However, upon the white paper’s release, there was significant political wrangling as Republicans questioned why the Federal Reserve would offer unsolicited advice, especially when it corresponded so closely with the Obama administration’s preferred policies and especially in a congressional election year.

“I was truly taken aback when just recently, as you know, the Fed issued an unsolicited white paper … on housing policy where, if you didn’t advocate for, you certainly mirrored much of the positions of this administration,” Republican Representative Scott Garrett told Federal Reserve Chairman Ben Bernanke.

“Why would you issue such a paper when we don’t ask for it?”

At a hearing in February, Bernanke actually apologized for the report. “We were trying to provide pros and cons, analysis, background — I’m sorry if you think we went too far,” he said.

The negative reception to the white paper presents a significant challenge to the Federal Reserve’s hope to build bipartisan support for its recommendations.

The paper suggests Congress enact several changes, including encouraging conversions from owner-occupation to rental properties. More than half the inventory of foreclosed properties in the U.S. is owned by Fannie Mae, Freddie Mac, or the Federal Housing Administration. Because many of the foreclosed properties would be viable as rentals, the Federal Reserve recommended a government-sponsored program that would ease regulatory complications in converting foreclosed properties to rental properties. As Bloomberg Businessweek pointed out in its January 22, 2012 issue, a faster rate of conversion would keep rent prices in check wile relieving the pressure of unsold homes on house prices.

The second major suggestion in the white paper is to encourage refinancing by reducing restrictions on eligibility to the Home Affordable Refinance Program (HARP). The Federal Reserve suggests the fees associated with refinancing could be eliminated or reduced. Borrowers with high loan-to-value ratios and mortgages not guaranteed by the Fannie Mae and Freddie Mac are not eligible for refinancing under HARP or any other program. If they were to back these mortgages, two million additional homeowners would qualify for refinancing.

However reasoned such recommendations may have been, the Federal Reserve had its efforts impeded by two of its own when, two days after the white paper was released, New York Federal Reserve Bank president William Dudley publicly called for Fannie Mae and Freddie Mac to reduce the debt of homeowners who have a record of timely payments. Dudley said focusing on those with sound payment records would refute the argument that relief benefits irresponsible homeowners.

Elizabeth Duke, a member of the Federal Reserve’s board of governors, then publicly criticized the Federal Housing Finance Agency saying the regulator should focus less on minimizing losses to Fannie Mae and Freddie Mac and instead ensure they are playing a role in fixing the crisis.

Reaction to Dudley and Duke’s comments was swift and negative.

“This extraordinary political intrusion … is a clear attempt to provide intellectual cover for politicians to spend more taxpayer money to support housing prices,” the Wall Street Journal said in an editorial.

Bernanke attempted to distance the Federal Reserve from Dudley and Duke’s comments, saying they represented personal opinions and not the reserve’s official position. But the political damage had been done, and parties from all sides showed the biggest obstacle to solving the U.S. housing crisis is overcoming the inevitable partisan wrangling that has replaced genuine debate on the issue.


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