Jan. 11 (Bloomberg) -- Republican Senators Orrin Hatch of Utah and Bob Corker of Tennessee rebuked the Federal Reserve for overstepping its role by making policy recommendations on how the U.S. government should take new steps to spur the housing market.
Hatch, the top-ranking Republican on the Senate Finance Committee, said yesterday that a housing study sent by Chairman Ben S. Bernanke to Congress last week, along with recent Fed speeches, “intrudes too far into fiscal policy advice and advocacy.” Corker said New York Fed President William C. Dudley’s suggestion last week that Fannie Mae and Freddie Mac reduce the principal of the loans they guarantee was “absolutely egregious.”
Fed officials have been increasing their calls for government measures to boost the housing market after record-low interest rates failed to revive borrowing. Bernanke last week sent lawmakers a 26-page staff study discussing policy options to help boost the housing market that said Fannie Mae and Freddie Mac might have to bear greater losses to stoke a broader recovery.
“It was kind of unusual for the Fed to get into that kind of detail on these institutions, which I’m sure everyone at the Fed knows right off the bat are very controversial political issues,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “It’s just asking for criticism.”
Silvia said that while it’s “perfectly reasonable” for the Fed to try to address the housing slump, he “probably would not have issued the paper” in an election year, when the Fed is “unfortunately at this point in time, part of the debate.” Republican presidential candidates Mitt Romney and Newt Gingrich have said they wouldn’t keep Bernanke, whose four-year term expires on Jan. 31, 2014, as Fed chairman.
“I believe that it is important to the interests of the Federal Reserve, including the independence of monetary policy, that the Fed refrain from providing any hint of activism regarding what are clearly fiscal policy choices,” Hatch said in a letter to Bernanke dated yesterday. “I worry that the unveiling of your staff’s housing white paper, to ‘provide a framework for thinking,’ treads too far into fiscal policy, and runs the risk of being perceived as advocacy for particular policy options.”
David Skidmore, a spokesman for the Fed in Washington, said in an e-mail that the central bank has a copy of the letter and would respond to Hatch.
Bernanke has given recommendations about Fannie Mae and Freddie Mac before. In October 2008, he said they should retain some form of government support and oversight even if the companies were transformed from their federal conservatorship to become private companies.
Dudley, Boston Fed President Eric Rosengren and Fed Governor Elizabeth Duke all said last week that the U.S. government should try new ways to spur the housing market, without agreeing about how much more the central bank needs to do to bring down interest rates.
San Francisco Fed President John Williams yesterday called for federal programs to support housing and “tax and spending policies” that would complement the central bank’s moves.
Dudley said Jan. 6 that Fannie Mae and Freddie Mac should allow underwater borrowers, those who owe more on their mortgage than their home is worth, to pay off their loan below par if certain conditions are met, including that the borrower stays current on payments.
“Reducing the principal on home loans for borrowers who put no money down amounts to a massive wealth transfer from places like Tennessee, where most homeowners have borrowed responsibly, to places like California and New York, where exotic mortgages were widely used to finance a speculative housing boom,” Corker said yesterday in Nashville, Tennessee, before the Greater Nashville Association of Realtors, according to a statement from his office.
“It is absolutely egregious that the Federal Reserve would insert itself in this manner and ask people in Tennessee who played by the rules to bail out reckless borrowers in other parts of the country,” Corker said.
Krishna Guha, a spokesman for the New York Fed, declined to comment.
In a cover letter to Congress sent with the report, Bernanke said that “restoring the health of the housing market is a necessary part of a broader strategy for economic recovery.” The paper notes that home prices have fallen an average of about 33 percent from their 2006 peak, resulting in the loss of $7 trillion in household wealth that has weighed on consumption.
--With assistance from Scott Lanman in Washington. Editors: Christopher Wellisz, Gail DeGeorge
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