Bernanke: No ‘Silver Bullet’ for Housing Woes

Bloomberg News
Fed Chairman Ben Bernanke speaking Friday at the National Association of Homebuilders International Builders’ Show in Orlando.

What more can the Federal Reserve do to help the home-building industry?

That was the question in the air when Fed Chairman Ben Bernanke took the podium Friday at the National Association of Home Builders’ International Builders Show for a keynote speech.

Thanks to Fed monetary policy, interest rates on 30-year fixed mortgages are already at or near their lowest levels in recorded history, making it cheaper than ever for consumers to finance the purchase of a home. And two weeks ago, Mr. Bernanke signaled publicly that short-term interest rates will remain low through 2014.

But clearly that hasn’t been enough. There were just 302,000 new homes sold in 2011, the lowest level on record, and housing starts remain in the dumps as well. To boot, the inventory of foreclosed homes is expected to grow by 1 million units per year for the next several years, based on Fed estimates, Mr. Bernanke said, which could further drive down prices and make it harder for new-home builders to compete with the existing-home inventory.

The Fed laid out its support for a foreclosure-to-rental program to reduce the overhang of empty and foreclosed houses last month in a 26-page white paper urging Congress to take action on housing. Mr. Bernanke reiterated that support Friday.

“Keeping paying tenants in homes — including leasing to the former owners at market rents — may, in some cases, be the best way to maintain property values and the quality of neighborhoods,” he said. “REO-to-rental programs could potentially also minimize the amount of time that a vacant property languishes in REO inventory.” He urged policymakers to pursue REO-to-rental programs, but warned that they are not a “silver bullet” for the housing market.

Mr. Bernanke’s speech also touched on the frustration felt by many housing policy makers and market experts, which is that many homeowners can’t take advantage of low interest rates to buy or refinance a home because of continued home-price declines. Problems with foreclosures and other factors that drive down homes prices are “constraining some of the effects that monetary policy should be having on the economy,” he said.

“To some extent the tightening of credit is to be expected . We know that credit standards became very lax before the crisis and for the safety of banks and the safety of our financial system and for the protection of borrowers, some tightening was no doubt necessary. That being said, I think the pendulum has probably swung too far in the other direction by this time.” he said during a question-and-answer session following his speech.

The audience applauded Mr. Bernanke’s remarks when they focused on housing as a solution, rather than a cause of the nation’s economy problems. In the question-and-answer session, Mr. Bernanke received a round of clapping for remarking on “how central to the recovery housing is.”

Another question came from a New York real estate investor who complained that banks won’t extend more than four mortgages because of certain rules put in place by investors and banks. In 2008, Fannie Mae and Freddie Mac, the main funders of mortgages, faced soaring losses from speculators and reduced to four from 10 the number of loans they would guarantee to any one owner. Fannie now backs as many as 10 loans, but some banks have kept lower limits.

“The reason for [the limit on lending to investors] is historical. Going back to the ’80s and ’90s, banks and [Fannie and Freddie] have had worse experiences with investors than homeowners generally,” Mr. Bernanke said. “At this time though, I think those policies are actually pretty counterproductive. We have all these homes on the market…investors out there would like to buy them and manage them and resell them, fix them up. What’s wrong with that? We’d like to see more of that happening.”

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