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Fed’s Dudley Calls for Government Action to Revive Housing

William C. Dudley
William C. Dudley, president and chief executive officer of the Federal Reserve Bank of New York, testifies during a House Oversight and Government Reform Subcommittee hearing in Washington on Dec. 16, 2011. Photographer: Andrew Harrer/Bloomberg

Federal Reserve Bank of New York President William Dudley called on the U.S. government to try new programs to revive the housing market while saying the central bank may still consider ways to cut interest rates.

“Implementing such policies would improve the economic outlook and make monetary accommodation more effective,” Dudley said today in a speech to bankers in Iselin, New Jersey. At the same time, it’s “appropriate” for the Fed to consider steps to ease monetary policy, he said.

Policy makers are considering further monetary easing to help lower an unemployment rate that registered 8.5 percent in December, according to a Labor Department report released today before Dudley spoke. Fed Chairman Ben S. Bernanke this week urged Congress to do more to revive the housing market, calling it an impediment to the economic recovery.

“Because the outlook for unemployment is unacceptably high relative to our dual mandate and the outlook for inflation is moderate, I believe it is also appropriate to continue to evaluate whether we could provide additional accommodation in a manner that produces more benefits than costs, regardless of whether action in housing is undertaken or not,” Dudley said in remarks to a New Jersey Bankers Association economic forum.

Dudley, 59, a former Goldman Sachs Group Inc. economist, said in response to audience questions that the excess of housing in the U.S. is “not that large.” He serves as vice chairman of the central bank’s policy-setting Federal Open Market Committee.

‘Relatively Quickly’

“You could actually see a turnaround in the housing market relatively quickly, within a year or two,” he said. “What I’d like to do though is make that sooner rather than later. That’s why I think some of these programs would be helpful in that regard.”

The Labor Department said today that 200,000 jobs were added to payrolls in December, the most since September. The jobless rate declined to 8.5 percent, the lowest since February 2009, from a revised 8.7 percent in November. Dudley didn’t discuss today’s jobs report in his prepared text.

The U.S. economy probably grew at a 3.6 percent rate during the fourth quarter, according to Macroeconomic Advisers, a St. Louis-based forecasting company. That would be the fastest rate since the second quarter of 2010 and double the third quarter’s 1.8 percent growth.

The yield on the benchmark 10-year Treasury note fell three basis point to 1.97 percent, while the Standard & Poor’s 500 Stock Index declined 0.4 percent to 1,276.48 at 9:46 a.m.

Alter Language

The Fed said this week it will begin publishing officials’ projections for the benchmark interest rate with the next meeting Jan. 24-25 and signaled it may alter language saying rates are likely to stay near zero until at least mid-2013.

In September, the Fed decided to reinvest maturing housing debt into mortgage-backed securities instead of Treasuries to support housing. Bernanke has said the central bank may embark on another round of asset purchases to lower borrowing costs and spur the two-year expansion.

Fed officials have been increasing their calls for government measures to boost the housing market after record-low interest rates failed to spur borrowing. Bernanke this week sent Congress a staff study discussing policy options to help boost the housing market.

‘One Factor’

Dudley said that while the housing market is “only one factor behind the frustratingly slow” recovery, it’s an “important one that deserves our attention.” There’s a risk that housing will “linger in an extremely weak state for longer than is necessary,” he said.

He detailed options designed to prevent foreclosures, ease refinancing of mortgages and get renters into lender-owned properties.

“I would like to see refinancing made broadly available on streamlined terms and with moderate fees to all prime conforming borrowers who are current on their payments,” Dudley said.

Dudley called on Fannie Mae and Freddie Mac to play a greater role in the housing recovery, including by reducing the principal of loans they guarantee. He said the government-sponsored-enterprises should allow underwater borrowers, those who owe more on their mortgage than their home is worth, to pay off their loan below par if certain conditions are met including that the borrower stays current on payments.

Stay Current

“I believe we should also develop a program for earned principal reduction for borrowers who are underwater but keep on making their mortgage payments,” Dudley said. “Such a program would strengthen the incentives for mortgage holders who are underwater to continue to stay current on their loans, and reduce the likely number of defaults” and real estate owned sales.

The Federal Housing Finance Agency, which is charged with conserving Fannie Mae and Freddie Mac assets, has opposed such a move. Acting Director Edward J. DeMarco has said forcing the companies to lower interest rates on loans they own or guarantee could require them to post even bigger losses. That in turn would force them to draw more aid and raise the cost of the bailout.

One of Dudley’s ideas appeals to patriotism: create a tax credit or other subsidy to help U.S. war veterans buy homes. Many veterans “might otherwise not be able to purchase homes today,” Dudley said. “Our nation owes them a great debt, and such a policy would provide a boost to housing demand quickly.”

Broader Recovery

The study sent by Bernanke said Fannie Mae and Freddie Mac might have to bear greater losses to stoke a broader recovery and noted “tension” between aiding the economy and minimizing losses of the bailed-out government-sponsored enterprises. Fannie Mae and Freddie Mac depend on taxpayer aid for survival.

Bernanke, in a cover letter, said that “restoring the health of the housing market is a necessary part of a broader strategy for economic recovery.” The paper notes that home prices have fallen an average of about 33 percent from their 2006 peak, resulting in the loss of $7 trillion in household wealth that has weighed on consumption.

The average rate for a 30-year mortgage fell to 3.91 percent in the week ended yesterday, matching the lowest level in records dating to 1971, from 3.95 percent, Freddie Mac said in a statement.

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