Pianalto Says Housing Is ‘Significant Headwind’ to Economy

Federal Reserve Bank of Cleveland President Sandra Pianalto said weakness in the housing market is an impediment to U.S. growth and that “foreclosures have become a national crisis.”

“Housing market issues pose a significant headwind to our economic recovery,” Pianalto said in the text of remarks given in Cleveland today. “Specifically, losses in housing wealth have held back consumer spending, sapped household confidence, and reduced the ability of small-business owners to obtain credit.”

The policy-setting Federal Open Market Committee voted last month to extend its pledge to keep its benchmark interest rate low until at least late 2014, pushing back a previous date of mid-2013. Fed Chairman Ben S. Bernanke said on Jan. 25 that weakness in the housing market was an “important reason” why the economy has been weaker, and that the U.S. central bank was considering additional bond purchases to boost growth.

In September, the Fed decided to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to further reduce borrowing costs. Policy makers also decided that month to reinvest maturing housing debt into agency mortgage-backed securities, switching from Treasuries. Both of those policies were maintained at last month’s FOMC meeting.

Bank Earnings, Credit

Pianalto said “housing issues” also “continue to affect bank earnings and credit quality.” She didn’t comment on the outlook for monetary policy or the economy in the remarks.

Bernanke said today in Orlando, Florida, that the central bank’s efforts to spur economic growth are being blunted by impediments to mortgage lending and called for further steps to heal the housing market.

The Fed Chairman 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. “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 Cleveland Fed’s Pianalto also spoke in support of land banks today.

“Our research leads us to believe that land banks can play a vital role in the mix of policy options to address abandoned properties, specifically low-value properties,” Pianalto said. “The Federal Reserve Bank of Cleveland has actively supported this concept as it was being planned and implemented locally.”

To contact the reporters on this story: Caroline Salas Gage in New York at csalas1@bloomberg.net; Mark Niquette in Columbus at mniquette@bloomberg.net.

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

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