Ben Bernanke Offers A Game-Changing Recommendation For The Housing Industry

house home foreclose mortgage sale housing foreflosure

A white paper (via @carney) sent from Ben Bernanke to the chairs of the Senate and House committees on banking and financial services and released today is not just a subtle nudge at Congress to do something to address lingering weakness in the housing industry.

For the generally tight-lipped Federal Reserve, this sounds a lot like a call to action.

In the release, the Fed suggests that the government find a way to convert a significant segment of the stock of real estate owned properties (REOs)—essentially, properties held by banks or other institutions after foreclosure—into rentals. While it refrains from making specific policy recommendations, it emphasises the importance of doing something to help bear the burden of reviving the housing industry.

The challenge for policymakers is to find ways to help reconcile the existing size and mix of the housing stock and the current environment for housing finance. Fundamentally, such measures involve adapting the existing housing stock to the prevailing tight mortgage lending conditions–for example, devising policies that could help facilitate the conversion of foreclosed properties to rental properties–or supporting a housing finance regime that is less restrictive than today’s, while steering clear of the lax standards that emerged during the last decade.

In fact, it goes so far at to suggest that the government could screw up the recovery if it doesn’t start supporting such housing initiatives:

Looking forward, continued weakness in the housing market poses a significant barrier to a more vigorous economic recovery…

Absent any policies to help bridge this gap, the adjustment process will take longer and incur more dead-weight 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.

Outside the general policy recommendations, this report also struck us as being a little payback for all the flack Bernanke has been receiving from Congress these days. The ball is now firmly in their court.