It’s housing, stupid. More precisely, it’s housing finance.
As the Obama administration seeks ways to revive the economy, not to mention win an election, it is becoming clear that the biggest mistake officials made when they took office nearly three years ago was to underestimate the continuing damage to the economy from the mortgage crisis.
“There is widespread agreement among economists that housing debt is at the heart of the slow recovery,” said Kenneth Rogoff, the Harvard economist, “and that finding a way to bring it down faster would accelerate the recovery.”
The administration has sought to encourage mortgage modifications by making it easier for homeowners who owe more than their homes are worth to nonetheless refinance their mortgages. But the success of that effort seems to have been limited, and calls are growing for more action.
Interestingly, it is Federal Reserve officials, who normally seek to avoid commenting on specific government policies outside the range of monetary policies, who have been sounding the alarm with increasing regularity. They have made clear that they fear monetary policy will not be enough to get the economy moving, and that they need help from Congress and the White House.
“We at the Federal Reserve are moving vigorously to promote a stronger economic recovery,” said Janet Yellin, the Fed’s vice chairman, in a speech in San Francisco this week. “However, monetary policy is not a panacea, and it is essential for other policy makers to also do their part. In particular, there is a strong case for additional measures to address the dysfunctional housing market.”
William C. Dudley, the president of the Federal Reserve Bank of New York, laid out a housing agenda when he spoke at West Point last month. He said action was needed to make it easier for more people to qualify for mortgage loans, and also broached an idea for something that so far has gotten little political support but probably will be necessary: reducing the amount that many borrowers owe while letting them keep their homes.
He suggested that borrowers who were under water on their loans — that is, they owe more than their houses were worth — but were still making their payments should be able “to earn accelerated principal reduction over time.”
Any such plan risks infuriating homeowners who were responsible and did not borrow more than they could afford to pay. One way to improve the perceived fairness of a plan to allow principal reductions would be to tie such reductions to a structure that would give the lenders a share in any recovery in property values when the homes were eventually sold.
To many Republicans, the answer is simply to let the markets sort it out. That prescription seems to be based more on ideology than on any actual analysis of how the housing market is functioning, and it seems to infuriate Fed officials.
“Regardless of how we got here, we, as a nation, currently have a housing market that is so severely out of balance that it is hampering our economic recovery,” said Elizabeth A. Duke, a Fed governor, in a speech in September.
Mr. Dudley, the New York Fed president, also denounced the way the market was functioning. “In contrast to the efficient mechanisms in place in the commercial property market to work out troubled debt,” he said in his speech at West Point, “the infrastructure of the residential mortgage market is wholly inadequate to deal with a systemic shock to the housing market. Left alone, this flawed structure will destroy much more value in housing than is necessary.”
First impressions can be misleading, and nowhere is that more true than in understanding the housing mess. The first symptoms of trouble came in the subprime market, and it was the problems of that market that were first put under a microscope. We found loans that had been made to unqualified borrowers on terms that were, in some cases, outrageous. We found fraud. We found that credit had become far too easy to get.
And we found private-label mortgage securitizations that were stuffed with horrid loans that never should have been made, rubber-stamped by rating agencies, guaranteed by insurance companies and purchased by institutional investors without anyone in the chain doing any real due diligence. We found securitizations that were managed so haphazardly that papers proving who owns mortgages had disappeared.
Article source: http://feeds.nytimes.com/click.phdo?i=b4ef6b321481a7e95e76f804af8ce96c
Speak Your Mind
You must be logged in to post a comment.