Although it acknowledged broader negative economic factors, including high unemployment and consumer uncertainty, the Fed said specific housing policies were exacerbating the problem. It cited attempts to sell vacant and foreclosed homes flooding the sales market, a lack of mortgage credit for borrowers and inefficient foreclosure practices as problems within the industry.
The industry could encourage a faster recovery by moderating the number of foreclosed properties entering the sales market, opening up credit for more borrowers and streamlining the foreclosure process, said the Fed.
Fannie Mae and Freddie Mac, the government-sponsored enterprises that guarantee a large share of the mortgage markets and subsequently hold control of a large number of foreclosed and delinquent properties, are central to the debate. The agencies operate with the mandate to minimize taxpayer losses, but they have already needed more than $150 billion from taxpayers to remain solvent after a government takeover in 2008. But Fannie and Freddie are also charged with creating a stable and liquid mortgage market.
These twin goals lead to tension, said the Fed, as more attempts to aid homeowners, such as increased access to loan modifications and refinances, may open the GSEs to more losses.
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Nonetheless, some actions that cause greater losses to be sustained by the GSEs in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery, the Fed stated.
Some of the policy changes that the Fed suggested include converting some real estate-owned properties taken over by lenders into rentals, as the national rental market has been performing stronger than sales. However, large-scale conversion may be difficult due to the lack of properties owned in a concentrated area and price concessions.
Fannie, Freddie and the Federal Housing Administration control around half of REO inventory, while the rest is controlled by financial institutions, commercial banks and thrifts. The Fed estimated that while some REO housing stock is badly damaged and unsuitable for rentals, around 40 percent of Fannie's inventory and around half of the FHA's REO homes have returns that make renting potentially more profitable than selling.
The Fed said that while efforts have been made to expand access to mortgage refinances through the Home Affordable Refinance Program in 2009, only around 925,000 mortgages have been refinanced through the program. The Fed proposed reducing fees further and opening refinances to borrowers with loan-to-value ratios below 80 percent, as well as allowing borrowers with loans not guaranteed by the GSEs to be eligible for refinances.
The Fed also recommended that the mortgage servicing industry, which processes foreclosures, make data more readily available for investors, regulators and homeowners, allow for loans to be transferred to another servicers, centralize liens and change the compensation structure, which may favor foreclosure actions over other options.
Ultimately, the deflated condition of the housing market may reflect the oversupply of for-sale homes on the market, which were overbuilt as mortgage credit access ballooned prior to the recession, and housing policy continues to grapple with the imbalance, according to the Fed, but there are no simple solutions.
Restoring the health of the housing market is a necessary part of a broader strategy for economic recovery, stated the Fed. There is unfortunately no single solution for the problems the housing market faces. Instead, progress will come only through persistent and careful efforts to address a range of difficult and interdependent issues.