-
Edward DeMarco, acting director of the Federal Housing Finance Agency, all but begged lawmakers on Tuesday to begin the process of reforming the nation's housing finance system, saying Fannie Mae and Freddie Mac have been in conservatorship for far too long.
March 19 -
Reform efforts could result in a much smaller scope of permissible lending at the FHA, with a renewed focus on its traditional core of low-income customers, higher credit score requirements and increased down payments.
March 12 -
The best way to meet the needs of consumers and communities is to once again have the private sector play the lead role in the housing market, led by responsible local lenders.
March 4 -
The Bipartisan Policy Center has released a proposal that calls for a catastrophic government guarantee to backstop mortgages, similar to an idea first floated by the Treasury Department two years ago.
February 25
In a recent
He added, "as a result, I expect that labor market conditions will improve only slowly and that inflation will remain muted. Consequently, it will be appropriate for monetary policy to remain very accommodative."
Dudley explained the slow growth track that has persisted since the recession ended in mid-2009 on the fiscal drag. In 2012, real GDP grew just 1.6%, below the 2.2% rate of the preceding two years.
Fiscal restraint, or a smaller budget deficit, is often blamed for the slow recovery, but it is government policy that has been in the driver's seat since 2003 that is holding the economy back. The policy of liberal housing and consumer debt financing allowed the subprime bubble to form. The government's decision to rescue the banking system in 2008 was a costly one. Government spending to combat the Great Recession has helped the federal deficit
Dudley argues household debt has declined significantly relative to income since 2009 and the household financial obligations ratio has fallen to levels last seen in the early 1980s. This may be a result of prudent household behavior and not a clear indictor that families are ready to take on new debt. Yet, they need to get back on the credit horse for the economic recovery to hold.
It is indeed good news that housing prices are rising, and Dudley correctly sees recovery in home prices as particularly important for home building. So why hasn't the government done much more since the fall of 2008 to spur a housing recovery? Low interest rates and purchases of mortgage-backed securities by the Fed, currently running at $40 billion a month, is not enough by itself to increase mortgage lending by banks. There is still an overhang of houses in the foreclosure process and in underwater valuation situation.
The Fed could have avoided much of the pain of the Great Recession and lingering slow growth had it acted on monetary policy that linked the government's rescue of the banking system to a reasonable amount of lending to creditworthy individuals, households and businesses.
Lawmakers and regulators should have required or incentivized banks to lend as a condition of the bailout. The Fed's quantitative easing, for instance, could have been directly linked to passing on lower rates to consumers looking to refinance or take out new mortgage loans. This could have prevented a prolonged housing glut and depressed property prices from 2008 to 2012. Instead, its monetary policy has failed in transmitting excess free reserves in the banking system to the real economy. What good does it do to have excess reserves sitting in a bank vault?
The Fed, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and other federal and state agencies should now take steps to encourage banks to use their excess reserves to accommodate credit demand by individuals.
Additionally, while lenders should not be encouraged to return to the lax lending standards that preceded the housing crisis, the underwriting standards banks have adopted in reaction to the bursting of the bubble and Dodd-Frank stipulations are an overreaction toward safety and they are slowing the credit expansion and thus the economic recovery. Lawmakers and regulators should collectively revisit these parameters.
If QE3 is to succeed, the housing and business sectors need more accessible financing to move the GDP growth to the trend line of 4%.
Surendra K. Kaushik is a professor of finance at Pace University's Lubin School of Business in New York.