-Fed using Monetary and Regulatory Authority To Spur Housing Recovery

By Steven K. Beckner

SAN FRANCISCO {MNI) – Federal Reserve Chairman Ben Bernanke
defended the Fed’s low interest rate policies Thursday, saying that,
despite recent improvements, the housing market is “not out of the
woods,” and unemployment remains unacceptably high.

Calling mortgage credit “overly tight,” Bernanke said the Fed is
also using its regulatory authority to encourage banks to make loans to
creditworthy borrowers.

Bernanke made clear he is pinning high hopes on a housing recovery
to accelerate the pace of economic growth and job creation in remarks
prepared for delivery to the HOPE Global Financial Dignity Summit in
Atlanta, Georgia.

He stopped short of saying what more the Fed’s policymaking Federal
Open Market Committee to assure that, but left little doubt that at the
very least the FOMC will leave current pro-growth monetary policies in
place.

On Sept. 13, the FOMC approved the purchase of $40 billion per
month in mortgage backed securities until the labor market shows
“substantial” improvement, in addition to its $45 billion monthly
Treasury bond purchases under “Operation Twist.” It also delayed the
date of hikes in the federal funds rate from near zero until “at least
mid-2015,” and added that it expected to keep the funds rate there “for
a considerable time” even after the recovery strengthens.

Bernanke explained those policies in terms of the need to both
employment and the housing recovery.

“Although regulatory policy will be important for restoring a fully
functioning housing and mortgage market, the strength of the overall
economic recovery is crucial as well,” he said. “Obviously, loss of
employment or income makes it more difficult for families to pay their
mortgages, maintain good credit histories, refinance their mortgages at
lower rates, and avoid foreclosure.”

“People who are worried about their jobs are understandably more
reluctant to purchase homes, and households who have suffered hits to
their incomes face difficulty qualifying for a mortgage and saving for a
down payment,” he continued. “Concerns about the financial strength of
households and about the economic recovery also make lenders more
cautious.”

And so Bernanke said the FOMC has “sought to support the economic
recovery and maintain price stability — the two goals given to us by the
Congress — by keeping both short-term and longer-term interest rates
historically low. Low interest rates reduce the cost to households of
buying homes, cars, and other consumer durables while increasing the
attractiveness of new capital investments by firms.”

He said “increased demand in turn leads to faster economic growth
and more jobs.”

“My colleagues and I have been and remain quite concerned about the
stubbornly high level of unemployment — particularly long-term
unemployment,” Bernanke said. “We have taken strong actions throughout
the financial crisis and recovery to help stabilize the economy.”

Referring to the FOMC’s September actions, reaffirmed last month,
Bernanke noted, “we took the added step of stating that we will continue
actions to put downward pressure on longer-term interest rates until the
outlook for the job market improves substantially in a context of price
stability.”

“Our hope is that our statement provides individuals, families,
businesses, and financial markets greater confidence about the Federal
Reserve’s commitment to promoting a sustainable recovery with price
stability and that, as a result, they will become more willing to
invest, hire and spend.”

“In addition, of course, the historically low mortgage rates that
have resulted from the Federal Reserve’s policies are directly
supporting the housing market by putting homeownership within the reach
of more people,” he said.

The Fed chief had begun on an optimistic note, observing that “for
the first time in a number of years, the housing sector is improving,
adding to growth and jobs.” He pointed to increased home prices, sales
and construction.

However, he added, “the housing revival still faces significant
obstacles, and the benefits of that revival remain quite uneven.”

He observed that the various measures of housing activity are still
“much lower than they were before the crisis.”

“The housing sector is far from being out of the woods,” he said.

So Bernanke said “strengthening and broadening the housing recovery
remain a critical challenge for policymakers, lenders, and community
leaders.”

“The degree to which that challenge is met will help determine the
strength and sustainability of the economic recovery and the extent to
which its benefits are broadly felt,” he added.

Bernanke said some of the dearth in mortgage lending reflects lack
of demand for housing, not just unavailability of credit.

However, he said, “overly tight lending standards may now be
preventing creditworthy borrowers from buying homes, thereby slowing the
revival in housing and impeding the economic recovery.”

To help alleviate these credit constraints and to prevent home
foreclosures from causing economic and social problems, he said the Fed
is “encouraging the institutions we supervise to manage their
inventories of foreclosed homes in ways that do not exacerbate problems
in local neighborhoods, including renting them out, where appropriate,
rather than leaving the properties vacant.”

What’s more, Bernanke said that the Fed and other bank regulators
are working with banks “to try to achieve an appropriate balance between
reasonable prudence and ensuring that qualified borrowers are not denied
access to credit.”

** MNI **

–email: sbeckner@mni-news.com

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