Persistent weakness in housing is particularly problematic because it acts as a drag on spending and job creation in an environment in which such weakness can not be easily offset  8  A number of these issues were documented by an interagency task force that included the Federal Reserve and are being addressed through consent orders requiring supervised institutions to remedy deficiencies. 9  When the amount of debt secured by a property exceeds its likely net sales price, a “short sale” can be a less costly alternative to foreclosure. The short sale agreement between the homeowner and lender often grants the lender final approval of the sales price and may release the homeowner from any deficiency. 4  BIS central bankers’ speeches  by other policy adjustments. Housing policy should seek to break adverse feedback loops, promote more economically efficient outcomes in housing and support growth. In recent speeches,10 I have called for a “comprehensive approach” to stabilize the national real estate market and lay the foundations for recovery. I believe this should include measures to improve access to mortgage credit, reduce obstacles to refinancing, lessen the flow of homes into foreclosure through bridge financing and accelerated principal reduction, and to facilitate the absorption of REO back into use as owner- or renter- housing.
Because the home is the primary source of collateral for most households, financial institutions are less willing to lend when house prices have declined substantially and could fall further. In addition, problems in the foreclosure process and obstacles to efficient modification of loans in securitizations, which I’ll describe in a moment, make a house of a given value less attractive as collateral to secure a loan. As a result, as home prices have fallen, financial institutions have tightened  3  FRBNY Quarterly Report on Household Debt and Credit 2011 Q3. 4  Because housing is such an important asset for many households, household expectations of future income may also be influenced by what they observe happening to house prices. 5  These households have particularly strong incentives to increase saving to recreate a buffer against adverse events and to enable them to move house. Source of data is CoreLogic. 2  BIS central bankers’ speeches  lending standards. This has reduced the amount of credit available for households, including for small business formation. Fourth, the big drop in house prices has made it more difficult for borrowers to refinance. This has undercut to a degree the ability of monetary policy to support demand. Traditionally, refinancing activity has been an important channel through which lower interest rates support spending and employment. Refinancing frees up borrower income. Because those who refinance tend to have a higher marginal propensity to consume from income than the investors receiving the mortgage payments, such refinancing activity increases overall demand.