Bloomberg News

Fed Report Says Fannie, Freddie Losses May Aid Housing Recovery

January 09, 2012

Jan. 5 (Bloomberg) -- A report from Federal Reserve Chairman Ben S. Bernanke called the weakness in the housing market a “significant barrier” to U.S. economic health and said Fannie Mae and Freddie Mac might have to bear greater losses to stoke a broader recovery.

The study, delivered today to leaders of the Senate Banking and House Financial Services committees, noted “tension” between aiding the economy and minimizing losses of the failed government-sponsored enterprises, which depend on taxpayer aid for survival.

“Some actions that cause greater losses to be sustained by the GSEs in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery,” according to the study.

That tension was a theme throughout the 26-page report, which examined ways to clear the glut of foreclosed properties, protect homeowners from default, and help more borrowers take advantage of record-low mortgage rates. Doing nothing would chill an already-tepid expansion, according to the report.

A policy of no action will lengthen the housing slump, generate higher costs to the economy, push home prices lower and prolong “downward pressure on the wealth of current homeowners and the resultant drag on the economy at large,” the paper found.

The study was meant to provide a framework for “thinking about certain issues and tradeoffs,” Bernanke said in a letter accompanying the report. “Restoring the health of the housing market is a necessary part of a broader strategy for economic recovery.”

$7 Trillion Wiped Out

Home prices on average have fallen by a third from their 2006 peak, wiping out $7 trillion in household wealth. About one in four homeowners have homes valued at less than the size of their mortgage and are unable to refinance into lower interest rates.

The Fed has tried to jump-start lending by lowering its benchmark rate to almost zero and promising to keep it there until mid-2013. The central bank also has been trying to inject liquidity into the market by buying mortgage-backed securities. It currently holds more than $837 billion of the housing bonds.

Policy makers have pressed Bernanke for more fixes. In a closed-door meeting in October, Senate Democrats urged him to send them his ideas.

Obama Criticized

President Barack Obama, too, has drawn criticism for not doing enough to revive the housing market in the wake of the 2008 credit collapse, which pushed Fannie Mae and Freddie Mac toward insolvency and into government control. Since then, the two companies have borrowed more than $153 billion from a U.S. Treasury Department lifeline to continue operating.

Some economists have called for a federal refinancing program that would allow borrowers to quickly and easily lower the interest rate on their mortgages regardless of how much their home values have dropped or how much debt they carry.

The Federal Housing Finance Agency, which is charged with conserving Fannie Mae and Freddie Mac assets, has resisted such a move. Acting Director Edward J. DeMarco has said forcing the companies to lower interest rates on loans they own or guarantee could require them to post even bigger losses. That in turn would force them to draw more aid and raise the cost of the bailout.

The agency in October did expand an existing program to help some borrowers refinance regardless of how much their houses have dropped in value, saying it might help those homeowners avoid default.

More Solutions

More might be done, including streamlining the refinancing process, lowering fees charged by Fannie Mae and Freddie Mac, and relieving lenders of the obligation that they might be required to buy the loans back if they go bad, the report said.

Most of the issues raised by the Fed paper can be addressed without legislation, said Sean Oblack, a spokesman for Senate Banking Chairman Tim Johnson, a South Dakota Democrat. Oblack criticized the FHFA for focusing too much on the GSEs’ bottom lines.

“It is particularly telling that the white paper calls for regulators to evaluate their options on a more macro level rather than simply base evaluations on short-term gains or losses,” Oblack said.

The Fed report also focused on ways to prevent severe delinquencies with “a broad menu” of loan modifications and ease the conversion of foreclosed properties to rentals.

Easing borrowing requirements to allow investors to buy single-family properties in bulk and giving banks regulatory leeway to make loans on those purchases could boost the market, according to the report.

“The challenge for policy makers is to find ways to help reconcile the existing size and mix of the housing stock and the current environment for housing finance,” the study reported.

--With assistance from Craig Torres in Washington. Editors: Gail DeGeorge, Peter Eichenbaum

To contact the reporters on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net Craig Torres in Washington at ctorres3@bloomberg.net;

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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