Third, stabilizing the housing market will require doing something about the large and growing inventory of foreclosed properties. Aggressive efforts by the GSEs to finance mass sales of foreclosed properties to those prepared to rent them could benefit both potential renters and the housing market.
Fourth, there is the issue of preventing foreclosures, the initial focus of housing policy efforts. The right way forward is far from clear. While the Obama administration’s loan modification effort has been criticized for overly restrictive eligibility criteria, a significant fraction of those receiving assistance have ultimately been unable to meet even their reduced obligations, which suggests the difficulty of targeted foreclosure reduction. Surely there is a strong case for experimentation, with principal-reduction strategies at the local level. The GSEs should be required to drop their opposition to experimentation and move to a more constructive posture.
Fifth, there were clearly substantial abuses by financial institutions and most everyone in the mortgage industry during the bubble. Just compensation to the victims is a legitimate objective. But allowing negotiation over past actions to be the dominant thrust of policy creates overhangs of uncertainty that impose huge costs on the financial system and inhibit lending. A rapid resolution of disputes is equally in the interests of bank shareholders and the housing market. The FHFA should be striving to rapidly conclude this period of uncertainty.
Other players in housing policy could also help. Bank regulators could facilitate inevitable restructuring of underwater mortgages by requiring banks to treat second mortgages and home equity loans in realistic ways. The Federal Reserve could support demand and the housing market by again expanding purchases of mortgage-backed securities.
With constructive approaches by independent regulators, far better policies could be in place in six months and the tone of the market could improve immediately. There is nothing else on the feasible political horizon that can make as large a difference in driving America’s economic recovery.
The writer, a professor and past president at Harvard University, was Treasury secretary in the Clinton administration and economic adviser to President Obama from 2009 through 2010.
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