In a letter to the Congress, Ben Bernanke presented a white paper (“The U.S. Housing Market: Current Conditions and Policy Recommendations“) that details some of the Federal Reserve’s recommendations for healing the ailing housing market.
The paper states that home prices are down about one third from their 2006 peak, and the loss in value has accounted for about $7 trillion worth of losses in household wealth. The problems plaguing the housing market are well-documented, but are encapsulated neatly within this quote:
“The extraordinary problems plaguing the housing market reflect in part the effect of weak demand due to high unemployment and heightened uncertainty. But the problems also reflect three key forces originating from within the housing market itself: a persistent excess supply of vacant home on the market, many of which stem from foreclosures; a marked and potentially long-term downshift in the supply of mortgage credit and the costs that an often unwieldy and inefficient foreclosure process imposes on homeowners, lenders, and communities”.
Bernanke and his staff recommend three things that could help alleviate some of the problems facing the market:
- Policies that would help decrease the supply of unsold homes
- Making it easier for creditworthy borrowers to access mortgage credit
- Limiting foreclosures
To accomplish these goals, the paper recommends several courses of action. The first is to make it easier to convert foreclosed properties to rental units. The second is to loosen credit, particularly by making it easier for borrowers to refinance their mortgages. The third is to more aggressively avoid foreclosures and to pursue mortgage modifications and provide greater incentives to lenders to avoid foreclosure.
The white paper does not lay out specific blueprints as to how to achieve these goals (and in fairness, it does not aim to do so). Bernanke mostly lays out different ways that these goals could be achieved, and the potential pros and cons to some of these possibilities. I do not want to recap the entire paper here, but it contains some interesting data and is well worth reading in its entirety.
Of course, achieving these goals is easier said than done. The current toxic partisan atmosphere in Washington is one that seems to discourage cooperation and encourage knee-jerk obstructionism (see the debt ceiling fiasco, the payroll tax extension nonsense, and the current presidential campaign for just a few examples). The problems that face the housing market have existed for at least three years, and many of Bernanke’s solutions are common sense ideas that it doesn’t take a team of highly-trained economists to identify.
The lack of any sort of cohesive, cogent housing policy/vision from the White House and congress represents a critical failure on the part of our elected officials, republican, democrat, or otherwise. The whole situation smacks of Nero fiddling while Rome burns, and I am not optimistic that anything will be done to fix the situation anytime soon.
The Financial Crisis Inquiry Commission’s 
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