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Federal Reserve Shares Insight On Restoring A Healthy Housing Market

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By Jacque Johnson

Bernanke recently sent Congress a letter and white paper discussing his insight into how the current housing market problems are impeding economic recovery. Acknowledging that the housing market is only one piece to the puzzle, he writes that “Restoring the health of the housing market [is] a necessary part of a broader strategy for economic recovery” and that “progress will come only through persistent and careful efforts to address a range of difficult and interdependent issues”.

The key issues he identified as needing to be addressed included:

  • The excess supply of vacant homes due to foreclosures
  • A downshift in the supply of mortgage credit
  • The costs imposed on homeowners, lenders, and communities due to
    inefficient foreclosure process

He argues that relying on foreclosures to deal with homeowners that can’t meet their mortgage obligations is “costly and inefficient” and suggests that servicers “aggressively” pursue alternatives, such as:

  • Converting foreclosed properties to rental units as the market for rental housing is increasing.
  • Supporting a housing finance regime that is less restrictive, while at the same time avoiding the lax standards of the previous decade.
  • Implementing deed-for-lease options to homeowners: a program where borrowers return the home to lenders without foreclosure proceedings and with a rent-back arrangement.
  • Developing a broader menu of types of loan modifications to meet the needs of individual borrowers such as, modifying the interest rate or the term of the loan, typically resulting in a lower payment to the homeowner.
  • Offering principal reduction plans which would write down mortgage principals to the current market value and avoid foreclosure.
  • Incentives for servicers to seek alternatives to foreclosure, such as a short sale, agreeing to sell a home for less than the mortgage amount owed,  or deed-in-lieu, which allows the homeowner to return the property to the lender rather than go through the foreclosure process.