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Bernanke: tight credit conditions holding back recovery

While housing and the overall economy are showing signs of improvement, plans must be made to insure the “pendulum” of tight lending conditions does not continue swinging too far.



Federal Reserve Chairman opines on housing recovery

Federal Reserve Chairman Ben S. Bernanke said in a speech in Atlanta that the Fed will do what it can to help speed up a housing recovery, but the tight credit conditions faced right now are holding the sector back.

“We will continue to use the policy tools that we have to help support economic recovery,” Bernanke said. “The Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices indicates that lenders began tightening mortgage credit standards in 2007 and have not significantly eased standards since.”

He adds that while the tightening of standards after the subprime mortgage market crash, “it seems likely at this point that the pendulum has swung too far the other way, and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery.”

Similarly, the National Association of Realtors’ Chief Economist, Dr. Lawrence Yun, said he anticipates a housing recovery unless the nation is pushed over the “fiscal cliff” or there are “no further limitations on the availability of mortgage credit.”

Bernanke’s view on the way forward

Bernanke urges moving forward with record easing, including the plan to buy $40 billion in mortgage-backed securities ever month, which would spur growth and help reduce the unemployment rate, although some members of the Federal Open Market Committee (FOMC) said at their October meeting that while they “generally agreed” a housing recovery has begun, monthly mortgage bond purchases by the Fed are “likely to reinforce the nascent recovery in the housing market.”

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Continued weakness in housing

“Continued weakness in housing — reflected in falling prices, low rates of new construction, and historic levels of foreclosure — has proved a powerful headwind to recovery,” Bernanke said. “It is encouraging, therefore, that we are seeing signs of improvement in the housing market in most parts of the country.”

Bernanke said policy makers “have also taken steps to remove barriers to the flow of mortgage credit,” noting efforts by the Federal Housing Finance Agency and by Fannie Mae and Freddie Mac to clarify rules for defaulting mortgages. He said these steps should “increase the willingness of lenders to make new loans.”

When will the economy recover?

While regulatory policy “will be important for restoring a fully functioning housing and mortgage market, the strength of the overall economic recovery is crucial as well,” Bernanke said. The Fed’s policies have helped mortgage rates reach and remain at historic lows, helping with affordability.

Various FOMC officials say the central bank may need to expand its monthly purchases of bonds after the expiration of a program to extend the maturities of assets on its balance sheet (“Operation Twist”).

Bernanke closed by saying, “The Federal Reserve will continue to do what we can to support the housing recovery, both through our monetary policy and our regulatory and supervisory actions. But, as I have discussed, not all of the responsibility lies with the government; households, the financial services industry, and those in the nonprofit sector must play their part as well. In that spirit, I would like to close by expressing my appreciation and admiration for the work that so many of you are doing to restore our neighborhoods and to help individuals and families regain a solid financial footing.”

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Tara Steele is the News Director at The American Genius, covering entrepreneur, real estate, technology news and everything in between. If you'd like to reach Tara with a question, comment, press release or hot news tip, simply click the link below.

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