WASHINGTON — Federal Reserve Board Gov. Elizabeth Duke said Thursday that more must be done to ease payments on troubled borrowers to assist the still-struggling housing market.
"Clearly, the market is not functioning as it should," said Duke, at a housing finance conference hosted by the Fed. "Despite near-record-low interest rates, credit conditions remain tight for many consumers and investors interested in buying or refinancing residential real estate."
Declines in housing prices are typically enough to stimulate demand, particularly when combined with lower long-term interest rates.
"But for a variety of reasons, these mechanisms are not working fully in today's economy," said Duke. "When crafting solutions, it is helpful to first identify areas where removing some obstacles might enable these self-correcting mechanisms to operate more productively."
In the speech, Duke stressed the need to deal with the unprecedented number of loans in or entering the foreclosure pipeline, the number of properties acquired because of foreclosure and the impact distressed sales have on home prices.
"Regardless of how we got here, we, as a nation, currently have a housing market that is so severally out of balance that it is hampering our economic recovery," said Duke.
To help reduce the number of foreclosed homes, Duke, a former community banker, said troubled borrowers should be refinanced into loans at lower-interest rates.
The Fed, Duke said, has already done its part by keeping the federal funds rate low for an extended period through 2013.
Even so, the pickup of refinancing activity has been "subdued" compared to past times, she noted.
That's partly due to the fact that borrowers have not been able to take advantage of lower rates because they often have little or zero equity in their homes.
The Obama administration's Home Affordable Refinancing Program, or HARP, which was intended to help borrowers refinance, has not brought benefits to as many borrowers that have been estimated — roughly 4 million.
Duke cited several reasons why borrowers have not taking advantage of HARP, including loan-level pricing adjustments, which are upfront fees that are added to refinancing costs; putback risk; and junior lienholders who have been refusing to let their loans remain subordinate to a possible new refinance loan.
But she said allowing more refinancings remains a way to help put the housing market back on track.
"To the extent that more widespread refinancing reduces the overall volume of distressed mortgages, it likely reduces pressures on house prices which would, in turn, lead to lower losses on sales of foreclosed properties across all mortgage portfolios," Duke said. "Finally, removal of barriers to refinancing would boost the impetus to recovery provided by lower long-term interest rates."
Duke said policymakers have to find a way to remove barriers to refinancing.
"Finding different approaches to the polices that are hindering refinancing would likely provide some support to the economic recovery while improving the circumstances of homeowners and reducing the overall level of credit risk borne by the various holders of the risk," she said.
