Government lurches into actionBy Matt Carter, Wednesday, September 19, 2007.
More than a year after the housing market started showing weakness, several months after mortgage lenders started going belly up, and a few weeks after the resulting credit crunch started looking like a threat to the world's financial markets and the global economy, the wheels of government are slowly grinding into action.
The Fed cut the federal funds rate for the first time in four years Tuesday -- going the extra mile with a 50-basis-point reduction -- and the House passed an FHA modernization bill. The House passed a similar bill last year that got stalled in the Senate, and there's a chance similar problems could crop up this year. A Senate committee today kicked out its own FHA reform bill that's not as radical as the House version (which would get rid of down payment requirements and boost FHA loan limits in high cost areas to nearly $730,000). The Senate bill would lower down payment requirements from 3 percent to 1.5 percent instead of eliminating them, and boost the FHA limit in high cost areas from $362,000 to $417,000.
Although the Bush administration has made the FHA the centerpiece of its plans to provide relief to troubled borrowers, federal regulators who oversee Fannie Mae and Freddie Mac today cut the GSEs some slack to buy up more mortgages on the secondary market. The move by OFHEO didn't go as far as Fannie, Freddie and some Democrats have proposed, but was an interesting development, given how hard the administration has dug its heels in on the issue. The $417,000 conforming loan limit is likely to stay in place, however, unless Congress takes action.
There's some debate over whether cutting the federal funds rate will help channel money back into mortgage lending, and free market types aren't thrilled about unleashing FHA, Fannie and Freddie. But even for those who view such actions as the right approach, there's always the fear that they've come too late.
Robert Shiller, the Yale professor who helped develop the Case-Shiller Home Price Index, told members of Congress today that home prices have already fallen 6.5 percent, and are headed down another 7 percent to 13 percent by next August.
"I am worried that the collapse of home prices might turn out to be the most severe since
the Great Depression," he said. "It is difficult to predict the depth, duration and all of the
consequences of such a decline operating in a much more complex modern economy."
Programs like the Bush administration's FHASecure seem to be focused on homeowners with some equity, and won't stem the rising tide of defaults, Schiller said. He expects the Fed will take "aggressive action," which would mitigate the severity of the recession he expects to see. "But if home price deflation persists or intensifies, (the Fed) may discover that the Achille’s Heel of this resilient economy is the evaporation of confidence that can accompany the end of boom psychology," he warns.
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