Fed Says Tight Bank Policies Hurting Recovery

The Federal Reserve urged lawmakers and the administration this week to take a more hands-on approach to the housing market because the market’s continued struggles is holding back strong economic recovery. In a report it just sent to legislative leaders, it said lenders are keeping lending standards too tight, in part because of their concerns over bad-loan buy-back policies of Fannie Mae and Freddie Mac.

Under the policies, the secondary mortgage market companies make banks take back their loans if the loans are found to be underwritten in such a way that borrowers are unable to maintain their payments.
In a Wall Street Journal piece today on the Fed report, the Fed is reportedly concerned that lenders’ hesitancy to loosen overly tight standards is keeping households from taking advantage of the ultra-low interest rates the Fed has been encouraging.
The Fed suggested the agency that regulates Fannie and Freddie, the Federal Housing Finance Agency, should allow the two secondary mortgage market companies to absorb some short-term losses to enable an improving housing market to buoy the economy. “Some actions that cause greater losses to be sustained by the [companies] in the near term might be in the interest of taxpayers to pursue if these actions result in a quicker and more vigorous economic recovery,” the Fed said, as reported by the Journal.
The Fed is also recommending Fannie and Freddie convert some of their foreclosed single-family houses into rentals to get them out of the for-sale inventory, helping prices, and also to help meet solid rental housing demand.