Solutions for the Fed to consider
Ed Andrews of The Fiscal Times (as well as everyone else) reports that yesterday, Federal Reserve Chair Ben Bernanke testified before the Senate Banking Committee and remarked that the economy is uncertain, as is the Fed's strategy for dealing with it. On this lack of action, stocks fell.
It must be noted that the Federal Reserve owns a significant share of the mortgage backed securities outstanding and that these are of questionable value. Meanwhile, over at Freddie Mac and Fannie Mae, there is no desire on their part to participate in the new federal program to write down principal balances to 115% of market value. This program won't totally solve the problem of underwater mortgages, but could spur enough movement for market prices to go up so that these borrowers can compete with properties being sold at foreclosure - which are currently dominating the market.
The Fed needs to use the leverage it has in holding mortgage backed securities to force lenders - including Freddie and Fannie, to write down mortgage principal balances and reintroduce liquidity into the housing market. Until this happens, underwater mortgage borrowers will be forced to either sit on property they might otherwise sell or walk away. The threat of the walk-aways and foreclosures is providing the uncertainty that keeps the market on the brink of a double dip recession. Take away that uncertainty and money will again flow. It may hurt the Fed's balance sheet a bit, but not more than having to write the securities down because of massive foreclosures - which could sink the Fed.
How is this not obvious?
It must be noted that the Federal Reserve owns a significant share of the mortgage backed securities outstanding and that these are of questionable value. Meanwhile, over at Freddie Mac and Fannie Mae, there is no desire on their part to participate in the new federal program to write down principal balances to 115% of market value. This program won't totally solve the problem of underwater mortgages, but could spur enough movement for market prices to go up so that these borrowers can compete with properties being sold at foreclosure - which are currently dominating the market.
The Fed needs to use the leverage it has in holding mortgage backed securities to force lenders - including Freddie and Fannie, to write down mortgage principal balances and reintroduce liquidity into the housing market. Until this happens, underwater mortgage borrowers will be forced to either sit on property they might otherwise sell or walk away. The threat of the walk-aways and foreclosures is providing the uncertainty that keeps the market on the brink of a double dip recession. Take away that uncertainty and money will again flow. It may hurt the Fed's balance sheet a bit, but not more than having to write the securities down because of massive foreclosures - which could sink the Fed.
How is this not obvious?
posted by Michael Bindner at 4:41 PM
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