Fed Chair Says 'Normal Lending' Key to Recovery

The Federal Reserve’s monetary policy and efforts to keep interest rates low have contributed to increased housing affordability. However, those strategies have not yet had the desired effect of stimulating the economy into a full recovery as banks have stuck to their guns on strict lending standards.

“We want [banks] to take a balanced approach. We want to make prudent loans, but we don’t want them to turn away creditworthy borrowers,” said Federal Reserve Chairman Ben Bernanke during his speech Friday to home builders at the 2012 International Builders’ Show in Orlando.

Echoing recommendations outlined in the a Federal Reserve white paper released Jan. 5, Bernanke called for increased lending to creditworthy home buyers and more loan modifications and mortgage refinancings to help revitalize the housing industry and economy.

“Normal lending is a big part of getting the economy back on its feet,” said Bernanke, who also called for greater access to loans for investors to purchase homes in bulk.

Relaxed credit standards contributed to the housing crisis, thus tightened borrowing was necessary to protect banks, investors, and borrowers, Bernanke said. However, the lending pendulum may have swung too far the other direction.

REALTORS® are feeling the credit crunch affecting their clients, with 34 percent of reporting that mortgage accessibility is the biggest factor prohibiting their clients from purchasing a home, according to the 2011 NAR Member Profile.

The Fed has been working to improve lending conditions, helping banks become strong again through regulation and administering “stress tests” to ensure lenders have enough capital. And some progress has been made. According to a recent Fed survey of loan officers, there were reports of a slight uptick in lending nationwide.

Bernanke addressed other issues still hindering the housing market recovery, including the fact that 12 million home owners – or more than one in five borrowers with a mortgage – are underwater. Additionally, the drop in home equity by more than 50 percent since the peak of the housing boom has resulted in the loss of more than $7 trillion in household wealth nationally.

Federal Reserve staff estimate that distressed sales, which include both short sales and REOs, now account for 30 percent of home sales. And about one-fourth of vacant homes for sale in the second quarter of 2011 were bank-owned.

“With home prices falling and rents rising, it could make sense in some markets to turn some of the foreclosed homes into rental properties,” said Bernanke, advocating for REO-to-rental programs.

As of early November 2011, about 60 metropolitan areas each had at least 250 REO properties for sale by the GSEs and the FHA. However, NAR has asked policymakers “to proceed cautiously with the REO-to-rental program since housing markets are complex and varied.” NAR has also advised that any REO-to-rental program be administered by local entities, market experts, and licensed real estate professionals.

By Erica Christoffer, REALTOR® Magazine