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Economix Blog: The Fed’s Advice on the Housing Crisis

The Federal Reserve tried Wednesday to stir interest among policy makers in the problems afflicting the housing market, sending a white paper to Congress outlining suggestions for easing those problems.

The paper makes two basic points:

1. There are no silver bullets.

2. It certainly would be helpful if Fannie Mae and Freddie Mac, which are controlled by the government, gave the health of the housing market greater priority than their own short-term financial condition.

The Fed is concerned that the collapse of mortgage lending during the financial crisis is hardening into “a potentially long-term downshift in the supply of mortgage credit.” One reason for this, the paper says, is that Fannie and Freddie, which provide the money for most mortgage loans, are scaring lenders by aggressively seeking refunds on defaulted loans.

The policy helps Fannie and Freddie “maximize their profits on old business and thus limits draws on the U.S. Treasury, but at the same time, it discourages lenders from originating new mortgages,” the paper says.

In a similar vein, the paper says that Fannie and Freddie — known as government-sponsored enterprises, or G.S.E.’s — have pushed to resell foreclosed properties even when converting properties into rental units makes more sense. The paper calculates that for two-fifths of the properties owned by Fannie Mae, renting could actually reduce its losses.

The paper also gives a tepid review of recent changes to the Home Affordable Refinance Program, which seeks to help homeowners refinance into more affordable loans, noting that “more might be done.”

“The structure of the HARP program highlights the tension between minimizing the G.S.E.’s’ exposure to potential losses and stabilizing the housing market,” said the paper, which was delivered Wednesday to the chairman and ranking member of the Senate Banking Committee.

The Federal Housing Finance Agency, which has guardianship of Fannie and Freddie, has said repeatedly that it is required by law to minimize their losses, which are borne by taxpayers and already exceed $150 billion. The paper suggests this mandate could be interpreted more broadly, as “some actions that cause greater losses to be sustained by the G.S.E.’s in the near term might be in the interest of taxpayers” in the long term. It does not take the other road of calling for Congress to change the law.

Indeed, the overall tone of the paper is cautious, playing down, for example, the potential benefits of principal reductions for owners whose mortgage debts exceed the value of their homes. In this sense, it falls solidly in line with the conventional wisdom in Washington that policy makers lack the power to lift the housing market from its deep depression.

“There is unfortunately no single solution for the problems the housing market faces,” the paper concludes. “Instead, progress will come only through persistent and careful efforts to address a range of difficult and interdependent issues.”

Just the kind of work that Congress is equipped to handle.

Article source: http://feeds.nytimes.com/click.phdo?i=5db411e5eac09c507097c59e40c8eca7

Off the Charts: Usual Growth Leaders Absent From Recovery

Since the recession officially ended in June 2009, the number of government jobs has fallen 2.2 percent. In no other recovery since World War II has there been a decline over a similar period.

In recoveries before 1990, construction employment was always a contributor to economic growth, often a leading one. In part, that was because recessions were sometimes caused by the Federal Reserve pushing up interest rates. In an era when the rates that banks could pay on savings accounts were limited, that cut off the supply of mortgage credit. Fed easing meant that banks could lend again, and sometimes the results were explosive.

But in this recession the collapse in construction jobs came despite low interest rates. Easy credit had led to significant overbuilding, and the slump in construction employment, which began in mid-2006, has continued even after the National Bureau of Economic Research concluded that the recession was over.

Overall construction employment is down 28 percent from the peak. Before this cycle, the largest postwar decline had been 18 percent in 1974-75. That decline did not begin until the 1973-75 recession was well under way, and ended only a few months after the recession did.

The number of jobs in state and local government has declined in 21 of the last 24 months, according to seasonally adjusted figures from the Bureau of Labor Statistics, as many governments have been forced by declining tax revenue to seek savings. There was a brief blip in federal government employment because of temporary work for the 2010 census, but overall federal employment has grown at a very slow rate.

The recoveries that began in 1991 and 2001 came to be known as jobless recoveries, so being comparable to them is no great accomplishment. But over all, jobs growth during the first two years of recovery has been a little better than after the 2001 downturn, but a little worse than after the 1990-91 recession.

As can be seen from the accompanying charts, private sector employment, excluding construction jobs, has been a little better than after the two previous downturns.

To some economists, the high unemployment rate for construction workers creates an opportunity for badly needed spending on roads, bridges and schools. “The need for infrastructure spending is as great as ever, if not greater, than in the entire postwar period,” said Henry Kaufman, who runs his own advisory firm.

But that seems unlikely to happen, since current political pressure calls for reduced government spending. That pressure is also likely to lead to more layoffs in state and local governments, particularly when schools reopen in the fall. The targeted stimulus spending that might accelerate the recovery and prevent more layoffs is not on the Washington agenda.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://feeds.nytimes.com/click.phdo?i=b352568deadd4fe77334c9a10db54a63

Economix Blog: The Fed’s Advice on the Housing Crisis

Off the Charts: Usual Growth Leaders Absent From Recovery

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