Fed’s proposals to fix housing fall short

Major obstacles lie in income documentation, mortgage insurance rules
Published on Feb 13, 2012

In an important break from prior practice, Federal Reserve Chairman Ben Bernanke early in January delivered a staff document to both houses of Congress that called for important changes in housing policy. The major theme was that "continued weakness in the housing market poses a significant barrier to a more vigorous economic recovery," and "there is scope for policymakers to take action ..." Backdrop: the reduced effectiveness of monetary policy Before the financial crisis, the housing sector was a major part of the mechanism through which monetary policy impacted the economy. Monetary easing during recessions stimulated refinancing, homebuying and new home construction as a counterforce to weaknesses elsewhere in the economy. But not this time. While the Fed has reduced mortgage rates to the lowest levels ever, the impact has been weakened by tighter mortgage lending terms and eligibility requirements, an erosion of homeowner equity due to home-price...