Recent surveys by MacroMarkets and by Fannie Mae indicate that households expect negligible gains in home prices over the next few years, with many expecting that prices will continue to decline. Macroeconomic consequences The ongoing weakness in housing has made it more difficult to achieve a vigorous economic recovery. Housing has inhibited economic activity through a number of channels. First, the strong rebound in residential investment that typically powers economic recoveries following deep recessions has been absent. For example, nine quarters following the ends of the mid-1970s and early 1980s recessions, residential investment had climbed by 65 percent and 55 percent, respectively, above the level at the corresponding troughs. In contrast, during this cycle, there has been no rebound. In the third quarter of 2011, residential investment was still somewhat below the level in the second quarter of 2009. Second, by eroding household wealth, the decline in housing prices has contributed to greater weakness in consumption. For most American households the family home is by far the largest tangible asset, a buffer against misfortune, and often a significant savings vehicle to fund retirement.4 Since home values peaked in 2006, homeowners have lost more than half their home equity – about $ trillion – and expectations of future gains have also declined. At present roughly 11 million households are in negative equity with the aggregate amount of negative equity estimated to be roughly $ billion.5 Third, the weakness in home prices has reduced credit availability.
The Home Affordable Refinance Program, or HARP, was set up to facilitate refinancing of high loan-to-value prime conforming mortgages. The announced goal of the HARP was to  13  We should want the cost of misrepresenting loans to be invariant to the state of the jobs market. 14  Risk retention will also apply to some forms of mortgages in future. 6  BIS central bankers’ speeches  refinance 3 million to 4 million mortgages. However, shortcomings with the original program mean that less than a million HARP refinancings have taken place. Legal risks discouraged lenders from participating more fully in HARP to date. Notably, if a lender refinanced a loan made by another company, it was liable for the underwriting associated with the original loan. The profit from refinancing was unattractive relative to the risk of being forced to repurchase the loan. Given this, lenders had little incentive to compete to refinance loans and this led to higher mortgage rates and less refinancing. Many of these issues have been addressed by recent revisions to HARP and related decisions by Fannie Mae, but more could and should be done. Remaining legal issues could be alleviated by harmonizing standards between Fannie and Freddie. I would like to see refinancing made broadly available on streamlined terms and with moderate fees to all prime conforming borrowers who are current on their payments. This could substantially increase the number of refinancings.