Governor Elizabeth A. Duke on Rebalancing the Housing Market

TL;DR

Suggestions to address the housing market crisis include modifying loans, increasing refinancing opportunities, and converting REO properties to rental housing.

Transcript

(Applause.) GOVERNOR ELIZABETH A. DUKE: There is nothing better than being introduced by someone over whom you have oversight. (Chuckles.) Good afternoon. I'd like to join my colleagues in welcoming you to the Federal Reserve Board, where multiple viewpoints and lively discussions are a way of life. This policy forum, The Housing Market, Going Forw... Read More

Key Insights

• ❓ The housing market crisis cannot be solely attributed to subprime lending, as problems now extend to prime and FHA mortgages.
• 🎚️ Barriers such as loan level pricing adjustments and limited lender competition hinder HARP refinancing program.
• ❓ Converting REO properties to rental housing can benefit both rental and owner-occupied markets.

Questions & Answers

Q: What are the key factors leading to the current state of the housing market?

While subprime lending played a role, problems now extend to prime and FHA mortgages. Solutions should address the scale of these current problems rather than just focusing on subprime lending.

Q: What barriers impede the HARP refinancing program from benefiting more borrowers?

Four possible frictions include loan level pricing adjustments, limited lender competition, resistance from junior lienholders, and reluctance from mortgage insurers. These obstacles prevent borrowers from taking advantage of low rates and refinancing opportunities.

Q: How can converting REO properties to rental housing benefit the housing market?

Rental housing is in high demand, and converting REO properties could rebalance supply and demand. It may also be in the best interest of lienholders and guarantors, as recoveries from renting could exceed those from sales.

Q: How can land banks help control the effects of foreclosure on neighborhoods?

Land banks, which manage properties not dealt with adequately by the private market, can gain control of low-value properties, allowing for physical rehabilitation, rental, or eventual sale to owner-occupants. This approach can help stabilize troubled properties and prevent further deterioration.

Summary & Key Takeaways

• The housing market is out of balance, hampering economic recovery, and solutions must be based on private capital. The role of government in housing and mortgage markets needs defining.

• The policy response should evaluate the effect on both owner-occupied and rental housing markets, with a focus on the demand side and historically underserved segments of the population.

• Immediate priorities include dealing with the foreclosure pipeline, the disposition of REO properties, and the effect of distressed sales on house prices.