Eric Rosengren, president and CEO of the Federal Reserve Bank of Boston, has predicted that new government-backed efforts to help homeowners refinance their mortgages will spur a faster economic recovery.
In a speech delivered Wednesday at the Economic Outlook Seminar in Stockholm, Sweden, Rosengren, states that plummeting housing prices have created a lose-lose situation for homeowners, lenders and the wider economy.
‘While many households have been able to refinance and some new home buyers have taken advantage of the improved affordability of houses, falling home prices have made many unable to refinance, and many unable or unwilling to purchase a home,’ he said. ‘While the housing market would have been more severely impacted – and housing prices fallen more substantially – had the Federal Reserve not eased monetary policy aggressively, the impact of our policies on the economy has clearly been impaired by falling housing prices.’
Rosengren praised Fannie Mae for taking a ‘step in the right direction’ with its new product that allows a cash-out refinance of properties purchased with cash within the past six months. But he warned that additional programs will be needed to stimulate the housing market.
‘Two possibilities include allowing investors to access Federal Housing Administration 203(k) purchase-rehab loans and increasing the cap on the number of Freddie Mac loans that are available to a single investor,’ he continued. ‘In short, improving access to credit for responsible investors to purchase and improve properties would not only help provide affordable rental housing, [but it] would also help to boost housing demand and limit some of the collateral problems from the large supply of vacant homes.’
Furthermore, Rosengren expressed concern that a lack of confidence-inspiring housing policy, particularly in regard to the government-sponsored enterprises' (GSE) future role, will delay recovery efforts.
‘A third way to help today's housing market would be to provide as much certainty as possible regarding future government policy in this area,’ he said. ‘The GSEs are likely to play a different role in the new system. The uncertainty has real effects on how well our current system works. A case in point concerns GSE repurchase requests on delinquent loans.’
Noting problems with several existing federal loan modification program, Rosengren stated that a new approach to the foreclosure process should be considered in order to prevent a reprise of the current crisis.
‘The ultimate solution may be to rethink the foreclosure process from the start, and economic theory could play a role here,’ he said. ‘By influencing the costs and benefits of non-foreclosure transfers, a new system of ownership transfer might better align the incentives of borrowers and lenders, while still protecting the legitimate property rights of homeowners. If so, society as a whole would benefit.’