Bernanke calls for more action to revive the housing sector

The Federal Reserve is turning its attention to reviving the ailing housing market, calling on policymakers to provide a boost to the sector and lift the broader economy. 

The Fed on Wednesday sent a 26-page white paper to Congress, providing a framework — including several steps that are already in the works within the Obama administration — designed to provide greater stability for the sector and the overall economy.

Bernanke and other Fed governors have been pressing lawmakers for the past several months to do more to bolster the housing recovery in the face of a sagging economic recovery. 

"The ongoing problems in the U.S. housing market continue to impede the economic recovery," the report said. 

The housing market's recovery has been plagued by a broad range of problems, from a 33 percent drop in prices since their 2006 peak — resulting in a loss of $7 trillion in household wealth that has cut into consumer spending and confidence — to weak demand for housing because of persistently high unemployment, as well as excess supply of vacant homes on the market, many of which stem from foreclosures; tightened credit standards; higher downpayment requirements; an abundance of homeowners, about 25 percent, with negative equity; and high costs of the foreclosure process.

The surge of delinquencies overwhelmed the housing finance system and mortgage servicers failed to invest in the resources needed to handle them properly, "resulting in severely flawed and, in some cases, negligent servicing practices," the report said. 

"Looking forward, continued weakness in the housing market poses a significant barrier to a more vigorous economic recovery," the report states. 

The Fed paper outlined steps that policymakers can take on to reduce pressure on the sector. 

"We caution, however, that although policy action in these areas could facilitate the recovery of the housing market, economic losses will remain, and these losses must ultimately be allocated among homeowners, lenders, guarantors, investors and taxpayers," the paper said.

Policymakers could help by slowing the rise of the inventory created by a glut of foreclosures, remove some of the obstacles preventing creditworthy borrowers from accessing mortgage credit and limit those pushed into an "inefficient and overburdened foreclosure pipeline," the paper said. 

The Obama administration is examining ways to reduce the number of vacant, foreclosed homes by putting together properties to sell to investors for rental units. 

Sen. Jack Reed (D-R.I.) is pushing legislation that would convert hundreds of thousands foreclosed properties into rentals as demand rises for those types of properties. 

Policymakers also could reduce unnecessary foreclosures by expanding loan modifications, tailoring them better to individual borrowers, as well as policies to reduce the costs associated with foreclosures and minimize the negative effects on communities.

"As this paper suggests, however, there is unfortunately no single solution for the problems the housing market faces," the paper said. "Instead, progress will come only through persistent and careful efforts to address a range of difficult and interdependent issues."

Meanwhile, financial regulators have been in consultation with government-sponsored enterprises (GSEs) and originators about the sources of the apparent tightness in lending standards. 

The paper did not make suggestions on what lawmakers should do about mortgage giants Fannie Mae and Freddie Mac, which were taken over by the government in 2008 and have cost taxpayers more than $150 billion to keep afloat. 

The Treasury Department and lawmakers have floated ideas on reducing Fannie and Freddie's involvement in the mortgage industry but no agreement has been reached on the process. 

The paper did say that "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."

These deficiencies represented significant and pervasive compliance failures and unsafe and unsound practices at these institutions.