“The challenge for policy makers is to find ways to help reconcile the existing size and mix of the housing stock and the current environment for housing finance,” according to the paper sent to members of the Senate Banking Committee and the House Financial Services Committee. “Fundamentally, such measures involve adapting the existing housing stock to the prevailing tight mortgage lending conditions.”
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 Fed chairman said policies that would help resolve the slumping housing market could include programs to ease the conversion of foreclosed properties to rental properties. Avoiding foreclosure through “a broad menu” of loan modifications could also help minimize foreclosures, he said.
A policy of no action at all means “the adjustment process will take longer and incur more deadweight losses, pushing house prices lower and thereby prolonging the downward pressure on the wealth of current homeowners and the resultant drag on the economy at large,” Bernanke said in the 26-page paper released by the Federal Reserve Board today.
To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net;
To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net
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