Bernanke to Congress: Weak Housing Not Just Market Phenomenon

Federal Reserve Board Chairman Ben Bernanke told the U.S. House Budget Committee last week that tight mortgage conditions are preventing a stronger economic revovery because their adverse effect on home buyers is keeping inventory levels high, damping appreciation, and holding back new construction.

“Although low interest rates on conventional mortgages and the drop in home prices in recent years have greatly improved the affordability of housing,” households aren’t able to take advantage of these good conditions, he said.

Bernanke agreed with a question posed to him by Rep. John Campbell (R-Calif.) that there are steps Congress could take to ease regulatory issues that are contributing to the lending problem.

“I don’t think this is purely a market phenomenon,” he said. “I think there are a number of legal and administrative and regulatory barriers to housing being as strong as it should be.”

Although he didn’t go into detail at the hearing, a white paper the Fed sent to Congress two weeks ago lays out some of the issues it sees as a problem. One of them has to do with repurchase requirements by Fannie Mae and Freddie Mac. These requirements reduce lenders’ willingness to lend without strict underwriting overlays because based on certain underwriting matters, if the loans go bad, they could be on the hook to Fannie or Freddie for them.

Overlays are requirements over and above minimum underwriting standards of Fannie and Freddie and FHA.

“This hesitancy on the part of lenders is due in part to concerns about the high cost of servicing in the event of loan delinquency and fear that the GSEs could force the lender to repurchase the loan if the borrower defaults in the future,” the Fed says in the paper.

Also in the white paper, the Fed said Congress should consider allowing Fannie and Freddie, which are under federal conservatorship, to absorb some short-term losses if that would help get housing sales moving again, and that the two companies should be allowed to make some REO homes they hold in their inventory available to buyers for use as rentals.

President Barack Obama in his State of the Union speech last week and in a more detailed plan he released earlier this week is pursuing a limited pilot program with Fannie Mae to allow some REO sales for use as temporary rentals in some markets. NAR has said it wants to be sure the pilot is open to small- and medium-sized investors, not just big investors, and that real estate practitioners be used in the transactions to make sure they’re done in such a way that they don’t destabilize the local markets.

After Bernanke’s House Budget Committee testimony, NAR President Moe Veissi released a statement in support of the need for a sustained federal focus on the struggling housing market.

“We fully support Chairman Bernanke’s comments that the lack of available and affordable mortgage financing, low home values and high foreclosure inventories are inhibiting a meaningful housing market recovery,” he said. “His remarks coupled with President Obama’s new housing proposal announced earlier this week, shows that the administration and Federal Reserve recognize the vital role that real estate plays in both the short- and long-term health of the nation.”

In the video clip above, Bernanke talks about the barriers to a housing recovery. To watch the entire video, go to Bloomberg’s website.

Robert Freedman

Robert Freedman is director of multimedia communications for the NATIONAL ASSOCIATION OF REALTORS®. He can be reached at

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  1. Jeff Ferm

    Bernanke is a VERY strange duck. He was an advocate for the bank bailout, and now it sounds as if he wants the federal government and it’s regulators to dive in head first on credit availability “for those who should be able to take advantage of our low interest rates”. Stop it! Really, STOP IT! Government interference in the market CAUSED the housing crises…..”everyone has a right to own their own home”…and government interference will simply lead to a bigger mess now….we’ll come out of this on our own without MORE government interference….thank you very much Ben.