Dear Mr. Bernanke: Fix the Housing Mess
When Federal Reserve Chairman Ben Bernanke heads to Capitol Hill on Sept. 20 to talk to members of the Financial Services Committee, he shouldn't be feeling too confident. True, the markets have rallied for two days following his surprising interest rate cut of a half-percentage point, which temporarily calmed fears of economic calamity. The purpose of these hearings, however, will be to address the steps that President George W. Bush proposed in late August to help homeowners avoid defaulting on mortgages.
Bernanke may be able to confidently convince policymakers that he has staved off economic disaster, but much work is still left to be done. Foreclosures have hit record levels—they were up a shocking 36% month to month in August—and are still climbing. Oversight of the lending industry leaves much to be desired. Whether the markets should continue to work out the excesses or the government should step in with more aid—either through monetary or fiscal policies—is very much an open question and one that the experts are debating vigorously.
Past housing downturns were sparked by recessions and job loss, and occurred mainly in local markets. Not this time. Years of lax lending standards and aggressive practices by Wall Street banks to fund risky loans have touched off a housing crisis that spans not only the U.S., but the globe.
As the excesses unravel, stocks and credit markets are reeling. Corporations can't find funding and the home loan business for anyone with less than pristine credit has evaporated. Bernanke and Treasury Secretary Hank Paulson are trying to restore confidence and liquidity in the markets. Still many are worried: Will it be enough?
The debate over the best public policy response is now at full throttle. Some argue for a laissez-faire approach, to allow the markets to work it out. The worst operators have gone out of business and the lenders still standing have seriously reined in bad practices. Big banks and institutional investors, such as hedge funds and foreign pension funds, have taken billion-dollar hits and reassessed their appetite for risk. Their losses, however, are likely rounding errors, vs. the "real human consequences" of record foreclosures, says Matthew Fellowes, from the Brookings Institution, a public-service think tank in Washington.
Despite mounting societal costs, few politicians or regulators seem to have the appetite for a full-scale bailout. After all, real estate speculators who threw caution to the wind wouldn't be held accountable. Nevertheless, soaring foreclosures will create a resource drain for local governments and neighborhoods that can afford them least, and that's got housing advocates and bankruptcy attorneys up in arms.
Some compromises are already on the table: Expand tax-exempt authority for state housing-finance agencies so that they can provide low-rate financing to at-risk homeowners. Or provide funding to expand support for the network of nonprofit housing counseling agencies and attorneys to assist those seeking to negotiate the restructuring of mortgage debt with their lenders and servicers. The Bush Administration recently announced changes to the Federal Housing Authority rules that will allow some middle- and lower-income borrowers to swap their high-cost loans for more affordable government-guaranteed mortgages. Yet that program will assist no more than 60,000 homeowners. It isn't likely to be enough.
What will be? To find out, BusinessWeek sampled a poll of housing pundits, economists, money managers, and bankruptcy attorneys on the consequences of the housing bubble and what must be done to prevent abuses of the lending system in the future.
Check out the BusinessWeek.com slide show for 14 experts' suggestions for solving the housing mess.