Fallout persists from the Federal Reserve’s much-debated paper on the housing market, a set of policy recommendations sent to some Congressional leaders last week.
The rare guidance offered by the Fed angered some lawmakers, who say the central bank overstepped its mandate of setting monetary policy.
Now, there is apparently disagreement among Fed officials themselves on the central bank’s “intervention” – which so far has only amounted to a white paper entitled: “The U.S. Housing Market: Current Conditions and Policy Considerations.”
Moreover, there is disagreement on housing market remedies.
Fed Chief Ben Bernanke sent the 26-page paper to the leadership of the Senate and Housing banking and financial services committees.
“It is our intention to provide a framework for thinking about certain issues and tradeoffs that policymakers might consider,” Bernanke said in an introductory letter.
However, Federal Reserve Bank of Richmond President Jeffrey Lacker said today that the Fed should not delve into housing market policy.
“I don’t think we should be targeting specific markets, even a market as dear to the heart of Americans as the housing market,” Lacker told reporters. “If we do that we are just withdrawing credit from some other market and we are not the ones to decide that.”
Lacker also said that “it is not clear there are any easy fixes out there.”
But the Fed’s paper offers several scenarios for easing the foreclosure crisis, although they involve higher short-term risks for Fannie Mae and Freddie Mac, the mortgage financing companies taken over by the government three years ago and supported since then by taxpayer bailouts – about $170 billion so far.
“…Some actions that cause greater losses to be sustained by (Fannie and Freddie) in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery,” the Fed paper said.
Fannie Mae, Freddie Mac and the Federal Housing Administration together hold about half of the outstanding REOs (bank real-estate owned) properties. Together, the trio “might be able to aggregate enough properties to facilitate a cost-effective rental program in many rental markets,” the Fed paper suggested, alleviating the plight of some hard hit communities and boosting home prices.
St. Louis Federal Reserve Bank President James Bullard, though, said it could be disastrous to expand the roles of the government-sponsored enterprises (GSEs) Fannie and Freddie.
“I’d be wary of expanding the role of GSE’s in housing markets,” Bullard told reporters today. “They’ve already done tremendous damage,” and an expanded role “invites further disaster for the economy.”
In contrast, William Dudley, president of the Federal Reserve Bank of New York, has suggested that taxpayers and mortgage bond investors should facilitate mortgage principal reduction for distressed homeowners, a strategy covered in the Fed’s paper and one that would undoubtedly involve the GSEs to some extent.
“In an ideal world you’re doing writedowns more broadly but the co-ordination problems are almost insolvable,” said Mr Dudley, as quoted by the Financial Times. “It would be nice if the second-lien holders, for example, also had to take a hit.”
However, the Fed is not entirely sold on principal reductions. In its paper, the central bank said the strategy’s “benefits are hard to quantify.”
“Targeting principal reduction efforts on those most likely to default raises fairness issues to the extent that it discriminates against those who were more conservative in their borrowing for home purchases or those who rent instead of own,” the Fed said.
“I believe that it is important to the interests of the Federal Reserve, including the independence of monetary policy, that the Fed refrain from providing any hint of activism regarding what are clearly fiscal policy choices,” wrote Sen. Orrin Hatch, R-Utah, in a response to Bernanke. “I am sure that the Fed would not appreciate a white paper from Congress outlining how to think about and execute monetary policy.”