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A recent paper released by Fed economists has sparked a firestorm of criticism, but it could be just what policymakers need to jumpstart a much ailing housing market.
January 20
WASHINGTON — One day after President Obama proposed a new plan to accelerate refinancings, Federal Reserve Board Chairman Ben Bernanke warned that no single government solution can by itself fix the housing crisis.
"There is no conceivable program that is going to put everybody in the country above water," Bernanke told reporters at a press conference following the two-day meeting of the Federal Open Markets Committee.
Bernanke's comments echoed a recent white paper by the Fed that, while urging policymakers to develop answers for the housing problem, shied from recommending one approach, which could be seen as going beyond the central bank's mandate.
"It's important to say our intent in that white paper is to provide the benefit of our analysis to those who will be making policy," he said. "We did not take specific stands on individual issues; what we did was try to provide the pros and the cons and provide some context for these debates."
He did not weigh in specifically about the plan Obama discussed Tuesday night in the State of the Union. The proposal — which would require congressional approval — would use fees paid by banks to support an expanded effort to get troubled borrowers into cheaper loans.
Instead, Bernanke reiterated the Fed's view that some measure is needed to address the housing problem, which is still holding back the economic recovery. That was partially made evident by the FOMC's decision on Wednesday to postpone lifting record-low interest rates any earlier than late 2014.
Combined with a poor labor market, the excess supply of vacant homes, restricted access to mortgage credit and ongoing costs from an inefficient foreclosure process continue to hamper Fed efforts to promote a stable economy.
"The weakness in the housing sector is an important reason why the economy is not recovering more robustly," said Bernanke. "The problems in housing finance are part of the reason why monetary policy has not been more powerful because part of our transmission mechanism is to lower interest rates. It affects refinancings. It affects sales and purchases as well."
While not advocating any one approach, Bernanke did touch on some proposed measures to provide relief.
Bernanke said the Fed has "no official position" on one idea to have servicers write down a portion of borrowers' principal. He suggested that principal writedowns could help, but that they also have drawbacks.
"It seems very likely that principle forgiveness could be helpful depending on how it's structured in reducing delinquencies," said Bernanke.
As federal officials, state attorneys general and mortgage services continue to negotiate terms of a settlement to resolve claims of poor foreclosure processes — which is rumored to be upwards of $25 billion — Bernanke said whatever settlement amount results should answer the question: "What is the most cost-effective way to help as many people as possible?"
