Finally, over four years after the start of the Great Recession, the Fed, in a letter to Congress has started pushing some aggressive solutions to the housing crisis that may not sit well with investors and banks.
Bill Dudley, NY Fed President, Chairman of the Federal Open Market Committee, successor to Treasury Secretary Geithner…and Goldman Sachs alumus, of course…outlined a list of possible changes to housing finance mentioned in that letter. Here are a few:
– refinancing made broadly available on streamlined terms and with moderate fees to all prime conforming borrowers who are current on their payments
(Looks like the FED is starting to realize that buying mortgages and maintaining the stifling ZIRP policy at least through the middle of next year is not good enough. If you can buy an ice cream cone for only 10 cents, but don’t have a dime, the low price of the delicious desert serves as an unrequited temptation. The same is true with low refi rates when it is nigh impossible to qualify for the refi, for a host of possible reasons.)
– an “earned” principal reduction for borrowers who are underwater but kept on making their mortgage payments
(More bad news for investors and banks, but it does have a bit of a moral tinge to it: “If you’ve decided against ‘strategic default’, we will lower what you owe us.” Although this may improve the probability of repayment and ultimately reduce downward pressure on housing prices, it is against the Santelli inspired rant that resonates with so many and is given some credit for igniting the Tea Party. (http://youtu.be/zp-Jw-5Kx8k))
– Dudley also called for getting banks to accept more risk, have looser underwriting and smaller risk-based premiums, and getting appraisers to have less of a “downward” bias – just the opposite of urgings from bank regulators today.
– And he pushed for a $15 billion-a-year bridge loan program to those who are laid off so that they can keep paying their mortgage while finding a new job.
“Negative price expectations and flawed financing and administrative mechanisms, if left unaddressed, can contribute to ongoing weakness in housing demand and make it harder to generate a robust economic recovery,” Dudley said. He also downplayed moral hazard concerns from offering homeowners relief and further said they would be in the interest of taxpayers.
The FED letter also emphasizes the importance of turning REO (real estate owned) or near REO homes into rentals, in order to stabilize the housing market. In fact, a variant of this was proposed in our ‘From the Northwest Quadrant’ blog of November, 2008 (http://www.saai.com/index.php/lets-say-you-run-a-banka-modest-proposal/
…and was actually successfully accomplished by the FDR administration during the Great Depression.
The fact that these ideas are being mentioned by the FED at this late stage in the game…and publicized by a Goldman alum…shows just how serious the FED regards the housing crisis. Alas, it also reminds me of John McEnroe’s retort to a tennis judge as shown in this video: “You can’t be serious.” (http://youtu.be/ekQ_Ja02gTY)
Perhaps this time the FED just might be serious? And if it is, one must think carefully about the potential impacts of government policy on your company’s investment in both non-agency and agency RMBS.
Chairman Bernanke once saw no problem in the subprime crisis. But, perhaps the FED is now finally ready to actively and seriously discuss and promulgate viable alternative solutions to the housing crisis…instead of following a passive aggressive policy of keeping rates low, while leveraging its own balance sheet and hoping for the best.