–Mon Pol Accommodation Needed But Not Sufficient to Address Housing
–Housing Turnaround Could be Achieved ‘Relatively Quickly’
By Claudia Hirsch
ISELIN, N.J. (MNI) – New York Federal Reserve Bank President
William Dudley Friday said the economy needs further steps to spur a
housing recovery, beyond monetary policy alone, including facilitating
conversion of properties to rentals.
However, Dudley made it clear that additional monetary policy
accommodation may still be needed even in the absence of further housing
policies.
“Because the outlook for unemployment is unacceptably high relative
to our dual mandate and the outlook for inflation is moderate,” he said,
“I believe it is also appropriate to continue to evaluate whether we
could provide additional accommodation in a manner that produces more
benefits than costs, regardless of whether action in housing is
undertaken or not. Monetary policy and housing policy are much more
complements than substitutes.”
Touching on a subject the Fed addressed in a white paper issued
Wednesday, Dudley said the economy needs “a ‘comprehensive approach’ to
stabilize the national real estate market and lay the foundations for
recovery” including converting real-estate-owned properties to rentals
and removing obstacles to refinancing.
“I believe this should include measures to improve access to
mortgage credit, reduce obstacles to refinancing, lessen the flow of
homes into foreclosure through bridge financing and accelerated
principal reduction, and to facilitate the absorption of REO back into
use as owner- or renter- housing,” he said in a speech to the New Jersey
Bankers Association Economic Forum.
Such policies would make monetary policy accommodation “more
effective,” Dudley said.
He noted that “while the Fed will do all it can to achieve our dual
mandate of maximum sustainable employment in the context of price
stability, we have to recognize that there is more to economic policy
than just monetary policy.”
He continued, “Low interest rates help housing, but cannot resolve
the problems in that sector that are pressing on wider economic
activity. With additional housing policy interventions, we could achieve
a better set of economic outcomes than with just monetary policy alone.”
For example, Dudley said there needs to be a solution to the
“significant obstacles to refinancing” but the HARP program has fallen
short, and more should be done to address the shortcomings.
“Because the taxpayer, via Fannie and Freddie, is already exposed
to the risk of conforming loans defaulting, it makes no sense to make it
expensive or difficult for borrowers with these loans to refinance.
After all, refinancing reduces the credit risk to which taxpayers are
exposed,” he said, echoing Wednesday’s Fed White Paper study of housing
problems.
“I would like to see refinancing made broadly available on
streamlined terms and with moderate fees to all prime conforming
borrowers who are current on their payments. This could substantially
increase the number of refinancings.”
There also should be an effort to reduce foreclosures, especially
those caused by job loss of a homeowner, using bridge financing, Dudley
suggested, as well as a measure to help underwater homeowners who
continue making mortgage payments to earn principal reduction.
Another problem is the large volume of properties flowing into the
hands of lenders REO, and “This growing overhang could continue to
depress prices,” Dudley said.
Policies are needed to facilitate the “timely and orderly
absorption of these properties back into the market including as
renter-occupied housing,” he said. “Appropriate policies would
simultaneously lessen downward pressure on home prices and upward
pressure on rents.”
One step to address this would be for Fannie Mae and Freddie Mac to
increase the number of loans offered to individual investors, and the
government could consider tax incentives such as “a reduction of the
current 27-1/2 year depreciation period and/or a reduction of capital
gains tax liability if the property is held for a minimum period, such
as five years.”
Responding to questions from the audience, Dudley said, “Rental
markets are strong in part because some who would normally be buying
homes can’t afford to buy homes. So we’ve had a shift in demand.”
He noted that REO properties are “not getting back into the market
fast enough and efficiently enough” and rental homes are sitting vacant,
so getting them occupied, “could reduce upward pressure on rent.”
Dudley told the group that “we could see a turnaround in the
housing market relatively quickly, I think in a year or two,” and new
remedies could hasten that, since some adjustment already has taken
place and the overhang is not that large relative to the economy.
** Market News International **
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