Ben S. Bernanke is signaling his willingness to double down on a three-year bet that’s failed to revive housing, showing the extent of the Federal Reserve chairman’s effort to wrest a recovery from the deepest recession.
Since the Fed started buying $1.25 trillion of mortgage bonds in January 2009, the value of U.S. housing has fallen 4.1 percent, and is down 32 percent from its 2006 peak, according to an S&P/Case-Shiller index. The central bank is poised
to buy about $200 billion this year, or more than 20 percent of new loans, as it reinvests debt that’s being paid off. Some Fed officials have said they may support additional purchases that Barclays Capital estimates could total as much as $750 billion.
Even as Bernanke and fellow U.S. central bankers consider expanding their efforts, they are acknowledging their inability to turn around the housing market without help from the rest of the government. Bernanke underscored the importance of residential real estate, which represents 15 percent of the economy, in a study he sent to Congress last week that said ending the slump is necessary for a broader recovery.
“They’re definitely frustrated and disappointed,” said Stephen Stanley, chief economist at Pierpont Securities LLC and a former Federal Reserve Bank of Richmond researcher. “I’m sure they would have anticipated they would have gotten more bang for their buck.”
While the Fed has helped push mortgage rates to record lows of less than 4 percent, home-loan borrowing in 2012 is forecast to decline to the least in 15 years. Americans who might refinance and buy properties are getting shut out by stricter lending standards or avoiding transactions as values tumble amid mounting foreclosures, according to the Fed study.
Bernanke’s report urged Congress and President Barack Obama’s administration to consider steps with short-term costs for taxpayers, such as widening the role of Fannie Mae and Freddie Mac, the government-supported mortgage guarantors.
At the same time, the central bank’s purchases of mortgage bonds with yields at record lows is increasing the risk of eventual losses for the Fed, said Anthony B. Sanders, a professor of real-estate finance at George Mason University in Fairfax, Virginia.
So far, the Fed is reporting record profits. It said yesterday it will pay $76.9 billion to the U.S. Treasury as part of an annual dividend bolstered by its holdings. Brian Sack, the New York Fed’s markets group chief, said in October 2010 its goal in buying bonds would be to stimulate the economy not to generate profits and acknowledged it’s taking on some risk.
David Skidmore, a Fed spokesman in Washington, declined to comment on potential losses.
Federal Reserve Bank of New York President William Dudley, Eric Rosengren, president of the Boston Fed, and Fed Governor Elizabeth Duke followed Bernanke in highlighting the need to fix housing to speed the recovery.
Dudley called on the government to remove obstacles to refinancing, saying in a Jan. 6 speech to the New Jersey Bankers Association that the Fed is no “substitute” for government measures. Rosengren said that day in Connecticut he supports buying more mortgage-backed securities. San Francisco Fed President John Williams sees a “strong case” for the move, he said yesterday.
The Fed has taken unprecedented steps to lower borrowing costs as it held short-term interest rates near zero since 2008. It acquired $1.25 trillion of government-backed mortgage securities and $172 billion of federal agency bonds from December 2008 through March 2010, as part of a process known as quantitative easing, or QE. It embarked on a second stage involving $600 billion of Treasuries through last June.
In October, it began recycling proceeds from the mortgage and agency debt into home-loan securities, buying $80.2 billion through Jan. 4. Reinvestment will probably total about $200 billion this year, according to Barclays, JPMorgan Chase & Co. and Credit Suisse Group AG.
Dudley’s comments and the Fed study signal a greater likelihood of QE3, according to Ajay Rajadhyaksha, a Barclays analyst in New York, who has estimated it could involve $500 billion to $750 billion of mortgage-bond purchases over a year.
“The investment community is almost regarding quantitative easing as a free good and if it’s a free good, why not just do QE10,000,” said Sanders, a former head of mortgage-bond research at Deutsche Bank AG. “If rates start going up, somebody’s going to have to pay the tab, and you know who that is: John Q. Public.”
While central bankers are frustrated with the results of their record monetary stimulus, Sandra Pianalto, president of the Cleveland Fed, said yesterday after a speech in Wooster, Ohio that “on the margin” it’s affecting mortgage refinancing.
Last year, refinancings totaled $858 billion, according to a Mortgage Bankers Association estimate. Average rates on typical 30-year mortgages between 3.9 percent and 4 percent since early December, based on Freddie Mac data, bolster home prices by allowing property buyers to pay more. A monthly bill of about $1,430 covers a $300,000 loan at a 4 percent rate, versus $267,500 at 5 percent.
Unemployment is also easing. A Labor Department report showed that the jobless rate fell to 8.5 percent in December, the lowest since February 2009. Unemployment peaked at 10 percent that year as the financial crisis triggered the biggest economic contraction since the Great Depression in the 1930s.
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