NCRC Urges Fed To Stimulate Economy By Demanding Principal Reductions On Its Loans Worth $1.1 Trillion
Taylor Says Federal Government Has Power, Authority to Obtain Reductions on Majority of Mortgage Market
Washington, DC – In its efforts to stimulate the economy, the Federal Reserve should demand that banks reduce the principal balances on $1.1 trillion worth of loans it currently holds in mortgage-backed securities to prevent foreclosures and increase consumer spending, said John Taylor, President and CEO, National Community Reinvestment Coalition. He noted that the Federal Reserve, and other government entities, own or have authority over most of the mortgage market.
Taylor said foreclosures could also be reduced with carrot or stick incentives for banks borrowing from the Federal Reserve, or seeking to sells loans or do business with any other government entity. Through Fannie Mae, Freddie Mac and the Federal Housing Administration, the Federal government has power and authority over most of the mortgage market.
“The Administration needs to stop talking like it doesn’t have the power to stem the foreclosure crisis. They have more than the bully pulpit; they have tremendous leverage. The Fed, the GSEs and FHA are the secondary market today. Whether they write down loans they currently hold, or remove their willingness to lend, purchase and securitize loans, these entities have the power to force the industry to write down principal and prevent unnecessary foreclosures,” said Taylor.
“Ben Bernanke himself has tremendous power over these mortgages, and he should use it to demand principal reductions on the Fed’s loans and reap the benefits of greater consumer spending. If he does it, others will follow. By the way, it’s also the right thing to do,” said Taylor who, beginning in 2007, told the Bush Administration and then the Obama Administration that banks would not voluntarily assist borrowers in a meaningful way and that a mandatory effort should be put into place to stop foreclosures.
Both Administrations rejected that advice. Today most economists and housing experts agree that the banks are not doing enough to help borrowers and that the government’s voluntary approach has failed, especially since a growing number of homeowners owe more than their homes are worth.
The Federal Reserve is expected to announce today or Thursday the purchase of $500 billion in Treasury bonds to help avoid economic stagnation. Taylor said the Fed also has the power to help stabilize the economy by requiring banks to align mortgage loans with home values to stop foreclosures and steer money from mortgage payments to consumer spending.
Paul S. Willen, a senior economist at the Federal Reserve Bank of Boston, said at a recent Federal Reserve and Federal Deposit Insurance Corporation conference that both private and public efforts to date amount to “three years of failed policy.” As reported by The New York Times, Willen offered the conference attendees two solutions: “Require banks to modify loans, basically imposing the cost on them; or pay banks to modify loans, imposing the cost on taxpayers.”
Taylor said banks and investors should bear the costs, not taxpayers.
“By and large, homeowners aren’t underwater because of something they did to themselves or to their neighbors. They are underwater because Wall Street and the industry colluded to drive up our home prices and their profits. It’s time for them to eat their losses,” said Taylor.
The Los Angeles Times reported yesterday that of the estimated 15 million homeowners underwater, about 7.8 million owed at least 25% more than their properties were worth in the first quarter of this year, according to Moody’s Analytics’ calculations of Equifax credit records and government data. More than 4 million borrowers, including 672,000 in California, 424,000 in Florida and 121,000 in Illinois — three of the biggest real estate markets — were underwater more than 50%. Their average negative equity: a whopping $107,000.
Many homeowners in this situation still have jobs and can afford to make payments but cannot refinance to benefit from much lower interest rate because they owe too much. Economists fear a significant number of these homeowners may stop making payments, if the economy continues to deteriorate.
NCRC’s Board of Directors recently met with the Federal Reserve about foreclosure problems. “He seemed concerned about the issue; we hope he pursues the full range of actions at his disposal,” said Taylor.