WASHINGTON (2/29/12)--The Federal Reserve (Fed) is working to understand the reasons behind continued mortgage and home market difficulties "and the tradeoffs involved in designing policies that would remove obstacles to normal market functioning," Fed Governor Elizabeth Duke said during a Tuesday Senate Banking Committee hearing.
Duke was joined at the witness table by U.S. Department of Housing and Urban Development (HUD) Secretary Shaun Donovan and Federal Housing Finance Agency Acting Director Edward DeMarco during the hearing, which was entitled "The State of the Housing Market: Removing Barriers to Economic Recovery."
While recent economic difficulties slowed the purchase of new and existing homes, home sales have not picked up as the economy has recovered. "Six years after aggregate house prices first began to decline, and more than two years after the start of the economic recovery, the housing market remains a significant drag on the U.S. economy," Duke said in her testimony.
"In a typical economic cycle, as the economy turns down households postpone purchases of durable goods such as housing. Once the cycle bottoms out, improving economic prospects and diminishing uncertainty usually help unleash this pent-up demand. This upward demand pressure is often augmented by lower interest rates, to which housing demand is typically quite responsive," she told the banking panel, adding that the current economic recovery "has not followed this script."
She said that may be, in part, because the problems in the housing market are a cause of the downturn as well as a consequence of it.
Declining home values caused by economic issues resulted in $7 trillion in lost home equity, and "this substantial blow to household wealth has significantly weakened household spending and consumer confidence," she added.
Duke further noted that 12 million U.S. households owe more than their home is worth, and this lack of home equity is one of many factors that can lead to delinquencies, foreclosures and other issues if employment issues arise for homeowners. The high foreclosure rate caused by these issues is likely to continue, Duke said, and home prices will continue to decline as a result.
She added that tight lending markets are not helping to stoke demand, and said the Fed is considering addressing this issue by taking action to increase credit availability to households that wish to purchase a home or refinance their mortgage. The Fed may also explore the scope of future mortgage modifications and create new ways for owners of foreclosed properties "to dispose of their inventory responsibly."
Any new policy proposals "will require wrestling with difficult choices and tradeoffs, as initiatives to benefit the housing market will likely involve shifting some of the burden of adjustment from some parties to others," Duke said.
DeMarco in separate testimony addressed the steps his agency has taken to deal with housing issues, including "preventing foreclosures through loss mitigation, facilitating refinancing at today's low interest rates, and initiating a real estate owned (REO) program to address the supply of foreclosed homes."
DeMarco also addressed the Obama administration's strategic plan for the next phase of the conservatorships of Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac. The administration has suggested that the government gradually contract the GSEs' dominant presence in the marketplace while simplifying and shrinking their operations, and maintain foreclosure prevention activities and credit availability for new and refinanced mortgages.
For more on the witnesses' testimony, use the resource links.