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Fed’s Duke Says Regulatory Uncertainty Hurting Housing

Federal Reserve Governor Elizabeth Duke said the unresolved status of government-sponsored mortgage firms Fannie Mae and Freddie Mac is restraining the recovery in housing by helping to choke off credit.

“Uncertainty about the future on the part of lenders is inhibiting these investments” in mortgage lending, Duke said today in Washington, according to prepared text of her remarks.

Duke said mortgage lending is also being hampered by uncertainty over the outlook for home prices and government regulations as well as “the costs and liabilities associated with originating and servicing mortgage loans.”

Job gains, mortgage rates close to all-time lows, falling inventories of unsold homes and cheaper properties are underpinning residential real estate, which has struggled to recover as the availability and terms of mortgage loans has remained tight six years after home prices began their decline.

Duke said that in addition to economic uncertainty, regulatory changes for servicing requirements, capital requirements and underwriting requirements may constrain the flow of credit.

She did not comment on the specific rules that should be in place, saying that “regardless of what the final contours of the rules are, I think the mortgage market will benefit from having them decided so that business models can be set and investments calibrated.”

Spending Cuts

In response to audience questions, Duke said she saw a risk to the economy from government spending cuts and tax increases that are scheduled to kick in at the end of the year.

“I still have confidence that lawmakers will act,” Duke said, adding that until they do, the “uncertainty impacts every business decision and impacts every economic decision.”

Bush-era tax cuts, the payroll-tax holiday and extended unemployment benefits are all due to expire just as budget cuts are set to take effect in January of 2013. Duke said the combined impact of the changes amounted to about 4 percent of gross domestic product.

“Expectations at this point are that it’s something that will be addressed probably after the election so it’s a very short window for lawmakers.”

The national average 30-year mortgage fell to a fixed rate of 3.83 percent on May 10, the lowest on record, according to a Freddie Mac index.

Yet the Fed’s April 2012 Senior Loan Officer Opinion Survey showed that banks are less likely than in 2006 to originate mortgages to “any borrowers apart from those with the strongest credit profiles.”

Conservatorship in 2008

Washington, D.C.-based Fannie Mae and McLean, Virginia-based Freddie Mac, which issue mortgage securities to support home lending across the country, were taken into government conservatorship in 2008.

Since then, “policymakers have reached no consensus about the future structure of the GSEs and the role the government should play in the mortgage market,” Duke said at the National Association of Realtors Legislative Meetings and Trade Expo. “Private capital might be reluctant to enter the market until the future parameters of government support are resolved.”

New houses sold at a 328,000 annual rate in March, down from a 353,000 pace in February that was the highest in two years, according to Commerce Department. The 20-city Case-Shiller home-price index showed an increase in prices in the three months through February for the first time since April.

Six-Year Low

The inventory of homes for sale would take 6.3 months to clear in March, near a six-year low reached in January, according to the National Association of Realtors. The months of inventory reached as high as 12.1 months in July 2010.

Duke said that still-elevated foreclosures are “indicative of a historic level of homeowner stress, they are down from their post-crisis peaks, and there are signs that further gradual improvement may lie ahead.”

She said she saw “some promising signs in the trend of house prices as well” and “somewhat encouraging” indicators of housing construction activity.

“Notwithstanding these signs of improvement in the housing market, demand for owner-occupied housing remains stubbornly tepid,” she said.

Duke, 59, joined the Fed in August of 2008. Her term as governor ended in January of this year and she is continuing to serve as a successor has not been appointed. The board currently has two vacancies, and her departure would create a third.

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