The Federal Reserve, in a Jan. 4 report sent to members of Congress who sit on banking committees, warned that mortgage lending standards are holding back the nation’s economy.
The 26-page white paper was an unusual foray into the housing sector for an agency concerned primarily with monetary policy. But Federal Reserve Chairman Ben Bernanke stated: “Restoring the health of the housing market is a necessary part of a broader strategy for economic recovery.”
While acknowledging that lending standards were “lax, at best” during the housing boom, the report noted that “extraordinarily tight standards … currently prevail” and creditworthy borrowers often can’t qualify for mortgages. Obstacles include stricter underwriting, higher fees and interest rates, more stringent documentation requirements, larger required down payments, stricter appraisal standards and fewer available mortgage products, the report said. These conditions have stymied the Fed’s attempts to jump-start the housing market with record low interest rates to make houses more affordable.
The role of Fannie Mae and Freddie Mac, which operate under a mandate to minimize losses, might need to be adjusted, the report argued. Loan modifications, mortgage refinancing and the disposition of foreclosed properties might involve “near-term losses and risk exposure, [while] promoting a faster recovery in the housing market.”
One such example involved the conversion of foreclosed homes into rental units on a large scale, a process now made difficult by banking institutions and housing agencies. This proposal was discussed in some detail, as were “land banks,” typically public or nonprofit entities that purchase, rehabilitate, rent, sell or demolish low-value real estate.
To read a full copy of “The U.S. Housing Market: Current Conditions and Policy Considerations,” click here.