Fed Disagrees With GOP Candidates on Foreclosure Crisis

Jan 5, 2012 3:29pm

Mitt Romney has said the the government should let the foreclosure crisis run its course, but that would help the economy  recover, according to a new report by the Federal Reserve that calls on policymakers to take action on the housing front.

“There is scope for policymakers to take action along three dimensions that could ease some of the pressures afflicting the housing market,” the Federal Reserve said in a report on the U.S. housing market.

This would involve measures such as “devising policies that could help facilitate the conversion of foreclosed properties to rental properties — or supporting a housing finance regime that is less restrictive than today’s, while steering clear of the lax standards that emerged during the last decade.”

The report warns that in the absence of such policies, the downward pressure on the housing market could be prolonged, essentially dragging down the economy.

The housing market remains dismal three years after it crashed. Currently, 12 million mortgages worth $700 billion are underwater. Since its peak in 2006, housing prices on average have fallen 33 percent, resulting in a loss of $7 trillion to U.S. households.

Yet, there has been little talk of the housing market or how to resolve the ongoing crisis on the campaign trail.

Romney has presented the most talked-about solution thus far: let them “hit the bottom.”

In an interview with the Las Vegas Review Journal in October, the frontrunner suggested to not “try and stop the foreclosure process. Let it run its course and hit the bottom. Allow investors to buy homes, put renters in them, fix the homes up, and let it turn around and come back up.”

At a debate in Nevada later, he added: “The idea of the federal government running around and saying, hey, we’re going to give you some money for trading in your old car, or we’re going to give you a few thousand bucks for buying a new house, or we’re going to keep banks from foreclosing if you can’t make your payments, these kind of actions on the part of government haven’t worked.”

Ron Paul advocates a similar hands-off approach.

“Government’s supposed to be there to enforce contracts, not to undermine the contracts. So we’re going to give them the loan even if the value of the house has gone way down. This prolongs the necessary correction, the liquidation,” he said in a Fox News interview in October. “This is the reason we’ll be in doldrums for a long time, if we follow this attitude.”

Newt Gingrich wants to deregulate banks, which he says will allow more companies to offer refinancing.

One point the Federal Reserve makes that may ring better with conservatives: Let Fannie Mae and Freddie Mac take some losses for the betterment of taxpayers.

“Because of their outsized market presence, the GSEs’ [government-sponsored enterprises] actions affect not only their own portfolios, but also the housing market overall,” the report stated. “Some actions that cause greater losses to be sustained by the GSEs 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 Obama administration has launched several programs to jolt the sluggish housing market, but they have been met with mixed success.

The $75 billion Home Affordable Mortgage Insurance Program, launched in March 2009, didn’t attract as many distressed homebuyers as the administration had hoped. About 880,000 permanent modifications have been made through the voluntary program, considerably less than what proponents had in mind. Some people who took advantage of the program ended up defaulting again on their mortgage. Some experts said the HAMP program was not aggressive enough in tackling the issue. Others say the administration, instead of cracking down on banks, did the opposite by paying them to change mortgages of struggling homeowners.

“It should be recognized that other types of loan modifications may be socially beneficial, even if not in the best interest of the lender, because of the costs that foreclosures place on communities, the housing market, and the broader economy,” the Federal Reserve’s report stated, adding that such a move is likely to cost taxpayers more.

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