Orlando, Fla. -- Federal Reserve Chairman Ben Bernanke, addressing a crowd of home builders on the last day of the International Builders' Show here, did his best to explain how low mortgage rates -- his chief weapon to stimulate the housing market -- have fallen short of their goals. But Bernanke’s speech before a crowd of more than 200 attendees was not an apologie; on the contrary, Bernanke seemed a little frustrated about a lack of action in other government and business sectors and seemed worried about the overall effect of the housing crisis on the general economy.
“One of the effects of the decline in housing worth is to reduce the ability and willingness of households to spend,” Bernanke said. Underwater borrowers may have trouble paying for emergency health expenses, financing their children’s educations, or moving to a new location for a job opportunity because they can’t sell their current house.
“The state of housing and mortgage markets may be holding back the recovery of our financial system and the normalization of credit conditions,” Bernanke said. Although he acknowledged that lax lending standards helped precipitate the housing meltdown, now “the pendulum has probably swung too far in the other direction.” Current lending practices have been denying mortgages to creditworthy houses, even those who meet the standards of Government Sponsored Entities (GSEs). Private-label mortgage securities and their loan have virtually disappeared, Bernanke said.
“Lending to first-time home buyers has dropped precipitously,” he said, noting the ripple effect on move-up homebuyers.
With one-fourth of the excess supply of vacant homes for sales in the second quarter of 2011 owned by banks and other creditors -- commonly referred to as REO properties -- Bernanke worried that these homes will continues to exert downward pressure on home prices. The Feds estimate that an additional one million more foreclosure homes could be added to the REO pile over the next few years. In a “white paper” released last month, Bernanke’s staff outlined several proposals to get these homes off the market, converting them into rentals or turning them over to non-profit “land banks.” An REO-to-rental pilot program is currently under way, and the Feds have identified six other metro areas -- Atlanta, Detroit, Las Vegas, Chicago, Phoenix, and Riverside, Calif. -- where the concept could work.
In a question-and-answer session with the audience, Bernanke was asked how much he, as Federal chairman, could do to move forward on his ideas. The answer: Congress, the FHA and other government agencies will have to implement (or not) the proposals he put forth in his 26-page white paper called. “The U.S. Housing Market: Current Conditions and Policy Considerations.”
“Our goal was to put out there some main issues for people who have to make these decisons, and to make people realize how central to the economy housing is,” Bernanke said.
Bernanke’s staff is also communicating to the banks that now is not the time to be stingy.
“As regulators, we have been very clear to the banks that we do not want them to turn away creditworthy borrowers, and that includes home builders,” Bernanke said.