Bernanke - Housing Rebound May Hinge on Access to Refinancing

Nov. 1 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke can't go it alone when it comes to reviving the U.S. housing market.

Fed policy makers, who start a two-day meeting today, are considering buying mortgage-backed securities to push down borrowing costs and help homeowners refinance their debt. That would reduce monthly payments, freeing up cash for other purchases that could spur the economy and reduce unemployment, Fed Governor Daniel Tarullo said Oct. 20.

Such an effort would save homeowners $60 billion to $80 billion a year, or about 0.5 percent of gross domestic product, so long as the Obama administration succeeds in helping homeowners through a stepped-up refinancing aid plan, said Joseph Gagnon, a former Fed economist. Should the program fail, Fed asset-buying would probably provide homeowners less than half its potential savings, said Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington.

“The Achilles' heel of the Fed's efforts so far has been that the monetary-policy transmission has not worked as they would like because of, in large part, the inability of consumers to get loans” for homes and other purchases, said Ward McCarthy, chief financial economist at Jefferies & Co. in New York.

Refinancing Program

The Federal Housing Finance Agency said Oct. 24 it will let qualified homeowners refinance mortgages regardless of how much their houses have dropped in value, expanding terms of the 2009 Home Affordable Refinance Program, which has fallen 80 percent short of the goal of reaching 5 million borrowers. The FHFA estimates the changes will help generate about 900,000 refinanced loans by the end of 2013. If the alterations to the so-called HARP plan don't spur refinancing, any Fed purchases of mortgage bonds would bring limited benefits, said McCarthy, a former Fed researcher.

The Federal Open Market Committee, which has kept its benchmark interest rate near zero since December 2008, began a two-day meeting today and plans tomorrow to release a statement and economic projections from governors and regional Fed presidents. Bernanke is scheduled to hold a press conference at 2:15 p.m., his first since June and third since the Fed started the briefings in April.

Central bank officials may not be ready this week to pull the trigger on more bond-buying because of an increase this year in core inflation, which excludes food and fuel costs, Gagnon said. Once policy makers see slowing price gains for another month or two, “they will then feel empowered, indeed driven,” to restart asset purchases, he said.

‘Top of the List'

Tarullo, in a speech in New York last month, said additional mortgage-securities purchases should “move back up toward the top of the list of options” because “the aggregate -demand effect should be felt not just in new-home purchases, but also in the added purchasing power of existing homeowners who are able to refinance.” Fed Vice Chairman Janet Yellen said Oct. 21 that a third round of asset purchases “might become appropriate” if the economy's state warranted additional stimulus.

“I don't know how you could embark on a program of buying agency mortgages thinking you're going to stimulate more refinancing,” said Bryan Whalen, co-head of mortgage bonds at Los Angeles-based TCW Group Inc., which oversees $120 billion in assets. “It's not a rate issue, it's a qualification issue.”

Switch From Treasuries

The average rate on a typical 30-year fixed mortgage fell to a record low 3.94 percent in October, from this year's high of 5.05 percent, before climbing to 4.10 percent last week, according to Freddie Mac survey data. In September, the FOMC voted to reinvest proceeds from maturing housing debt into mortgage-backed securities, switching from Treasuries.

Treasuries rose as renewed concern Greece will default and the European rescue plan will unravel boosted demand for the safest assets.

The yield on the 10-year Treasury note fell 12 basis points to 1.9 percent at 11:09 a.m. in New York trading. New York Fed President William C. Dudley said Oct. 24 that removing “impediments” to the transmission of monetary stimulus would make the central bank's record easing more effective. The FHFA's plan to make it easier for borrowers with high loan-to-value ratios to refinance is “a step in the right direction,” he said, adding he hoped additional measures would follow.

Bernanke said in congressional testimony last month that the Fed needs help from other branches of government to aid the economy. “Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy,” he told the Joint Economic Committee Oct. 4.

Boosting Stocks

Gagnon urged the central bank to target a 30-year mortgage rate of 3 percent to 3.5 percent by buying as much as $2 trillion of mortgage-backed securities. While boosting stocks and supporting property prices, Fed asset purchases may help create at least 3 million jobs, he said in an Oct. 24 blog titled

“The Last Bullet.”

“The Fed could do stuff, and it would help, but there would be a lot of people who without HARP couldn't take advantage of it,” Gagnon said in a telephone interview.

Reduced home prices and tightened lending standards have slowed the pace of replacement home loans. The Mortgage Bankers Association forecast on Oct. 11 that refinancing this year would total $783 billion, down from $1.1 trillion last year, even amid lower interest rates. Refinancing peaked at a record $2.5 trillion in 2003.

Reduce Loan Rates

Stanford University Professor John Taylor, best known for the Taylor Rule formula that suggests how the Fed should set its benchmark interest rate, said more Fed purchases of mortgage bonds are unlikely to reduce loan rates.

Another round of purchases wouldn't cut rates “appreciably, and not really in any predictable way,” Taylor, an economic adviser to House Republican lawmakers, said in a phone interview.

Taylor and one of his graduate students, Johannes Stroebel, wrote a paper arguing that “it is difficult to detect a significant effect” from Fed purchases of mortgage bonds totaling $1.25 trillion from January 2009 to March 2010.

Gagnon, co-author of a Fed study that found the bond buying lowered borrowing costs and helped the economy, disputed Stroebel and Taylor's findings, saying they focused on the impact of the actual purchases, rather than the announcement.

Fewer ‘Distortions'

A May 2011 Bank of Canada review of research into central bank bond-buying said the Fed's MBS purchases “appear to have eased mortgage-market conditions.” At the same time, the Fed's $600 billion, second round of bond purchases, undertaken from November 2010 through June of this year, probably had a “more modest” effect because of fewer “distortions” in financial markets and the economy at the time, the Canadian central bank's researchers said.

Without the administration program sparking more refinancing, Fed asset purchases won't be of much help to the housing market, says Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, who opposes further bond-buying.

“If the pipeline is stuck, then it doesn't matter if mortgage rates are 4 percent, 3.5 percent or zero,” said Stanley, a former Richmond Fed researcher.

--With assistance from Jody Shenn in New York. Editors: James Tyson, Christopher Wellisz

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