Congress and Republican Presidential hopefuls may be calling for an end to the mortgage giants Fannie Mae and Freddie Mac, but a new White Paper from the Federal Reserve says a larger role is what’s needed. MHProNews.com has learned from CNBC.com that the Fed released the document suggesting Fannie and Freddie can help fix the housing mess. The paper says ongoing problems in the U.S. housing market continue to impede the economic recovery and notes that housing prices have fallen an average of about 33 percent from their 2006 peak, resulting in about $7 trillion in household wealth losses and an associated ratcheting down of aggregate consumption. At the same time, an unprecedented number of households have lost, or are on the verge of losing, their homes. Moreover the Fed paper says the significant tightening in household access to mortgage credit likely reflects not only a correction of the unsound underwriting practices that emerged over the past decade, but also a more substantial shift in lenders’ and the GSEs’ willingness to bear risk. Indeed, if the currently prevailing standards had been in place during the past few decades, a larger portion of the nation’s housing stock probably would have been designed and built for rental, rather than owner occupancy. 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. Absent any policies to help bridge this gap, the adjustment process will take longer and incur more deadweight 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.
