Bernanke Says Housing Market Holds Back Fed Efforts to Boost U.S. Economy

Federal Reserve Chairman Ben S. Bernanke said the central bank’s efforts to spur economic growth are being blunted by impediments to mortgage lending, and he called for further steps to heal the housing market.

“We have helped lower mortgage rates to the lowest point in many, many decades,” Bernanke told homebuilders today in Orlando, Florida. “Yet we are not seeing as much activity as we would like to see.”

Bernanke, who repeated that the pace of the recovery has been “frustratingly slow,” didn’t discuss the outlook for monetary policy. He devoted part of his speech to recommendations from a Fed study on housing that was sent to Congress last month and which prompted criticism from some lawmakers, who said the Fed has overstepped its authority.

“The state of housing and mortgage markets may also be holding back the recovery of our financial system and the normalization of credit conditions,” Bernanke said today to the National Association of Homebuilders International Builders’ Show.

Referring to the high standards of lenders following the housing bust, Bernanke said that “some tightening was no doubt necessary.”

“That being said, the pendulum has probably swung too far in the other direction by this time,” he said. “Conditions are still too tight for the health of both the financial system, for the construction industry and for our economy. ”

Greek Rescue

The Standard & Poor’s 500 Index fell 0.9 percent to 1,339.40 at 1:52 p.m. in New York as a plan to help Greece avoid default appeared to unravel and U.S. consumer confidence trailed estimates. The yield on the 10-year Treasury note fell to 1.96 percent from 2.04 percent late yesterday.

Record-low mortgage rates haven’t revived housing sales. The average 30-year fixed rate mortgage was 3.87 percent as of Feb. 9, according to a Freddie Mac index, the lowest in data going back 40 years.

Buyers purchased new homes at an annual pace of 307,000 in December. The figure is little improved from the 278,000 pace in August 2010, the least new home sales since at least 1963, according to the Census Bureau.

Bernanke said housing has been recovering slowly because “many lending institutions have tightened underwriting conditions dramatically, relative to the pre-recession period.”

“Current lending practices appear to reflect, in part, obstacles that are limiting or preventing lending even to creditworthy households,” he said.

Home Sales

Existing home sales climbed to a 4.61 million annual pace in December, up from 3.3 million in July 2010, the worst month on record, according to the National Association of Realtors.

Bernanke said foreclosed properties in poor condition that aren’t likely to attract buyers could be dealt with by land banks, government entities that have the ability to purchase and sell real estate, clear titles, and accept donated properties.

“Properties may be rehabilitated as rental or owner- occupied housing or, in extreme cases, demolished,” Bernanke said today. “Only some states have passed legislation to establish land banks, and most existing land banks lack the resources to keep pace with the number of low-value properties in the current inventory.”

The Fed chief also said he sees “potential” in programs that convert real estate owned homes -- those that are owned by banks after foreclosure -- into rentals.

Pretty Large

“In order for this to work, you have to have pretty large numbers of homes acquired,” Bernanke said, and that a program to provide financing for such conversions could be beneficial.

Bernanke last week was criticized by Representative Scott Garrett, a New Jersey Republican, for submitting the housing white paper to Congress. The paper discussed whether mortgage companies Fannie Mae and Freddie Mac should take more losses to support housing markets.

“Is this an invitation now to Congress that we should be issuing resolutions to what monetary policy the Fed should be doing?” Garrett asked during an appearance by Bernanke before the House Budget Committee.

Bernanke replied that the Fed had received requests for analysis of the housing market from members of Congress. “I am sorry if you think we went too far,” he said.

Richmond Fed President Jeffrey Lacker called the paper “something of a break” from the central bank’s posture of avoiding fiscal-policy recommendations. He also said the Fed should refrain from buying mortgage-backed securities.

“I don’t think we should be targeting a specific market, even a market as dear to Americans’ hearts as the housing market,” Lacker said in a Jan. 13 speech.

$25 Billion Settlement

Bernanke’s remarks followed the announcement yesterday that Bank of America Corp., JPMorgan Chase & Co. and three other U.S. banks reached a $25 billion settlement with 49 states and the U.S. government to end a probe of abusive foreclosure practices prompted by the collapse of the housing price bubble.

The U.S. Justice Department, Department of Housing and Urban Development and state attorneys general announced the agreement yesterday, which was more than 16 months in the making following a move by states to investigate bank foreclosure practices in 2010.

U.S. Attorney General Eric Holder called the agreement -- which also included Wells Fargo & Co., Citigroup Inc. and Ally Financial, Inc. -- the largest federal-state civil settlement in U.S. history.

Sales Improved

Confidence among U.S. homebuilders rose in January to the highest level in more than four years as sales and buyer traffic improved, according to the National Association of Home Builders/Wells Fargo sentiment gauge.

Chairman Bernanke understands the situation in housing,” said Barry Rutenberg, a Gainesville, Florida homebuilder who is chairman of the National Association of Home Builders and introduced Bernanke to a standing ovation. “This group is not normally, not always that warm and fuzzy.”

The Standard & Poor’s 500 Homebuilding Index has increased 23 percent this year.

“Simply put, our business feels more positive,” Donald Tomnitz, chief executive of D.R. Horton Inc., the largest U.S homebuilder by volume, said on a Jan. 27 earnings call. “We are entering fiscal year ‘12 feeling better than we have in six years and it’s been a long six years.”

-- With assistance from Craig Torres in Washington. Editors: James Tyson, Christopher Wellisz, Kevin Costelloe

To contact the reporters on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

Steve Matthews in Orlando, Florida at smatthews@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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