March 4, 2008

Fed officials: Housing crisis critical

In a conference on solutions to the slumping housing market, two Federal Reserve officials say the problem must be solved soon.

By David Goldman, CNNMoney.com staff writer

February 29 2008: 12:29 PM EST

NEW YORK (CNNMoney.com) -- Two Federal Reserve officials said Friday that the housing market could damage the economy even more severely than it has already if measures are not taken to correct it.

In speeches at the U.S. Monetary Policy Forum in New York, Eric Rosengren, president of the Federal Reserve Bank of Boston, and Frederic Mishkin, a member of the Federal Reserve board of governors, spoke about the critical nature of the housing market crisis.

"Further declines in housing prices could depress residential investment, reduce consumer spending, generate elevated foreclosures, and contribute to financial instability," said Rosengren.

"Taking appropriate monetary, regulatory, and fiscal actions to mitigate this risk seems prudent."

Mishkin worried that the housing market could pose an even greater threat to the economy if the United States enters a recession and does not demonstrate the modest growth that economists expect.

"It is important to understand ... how significant the downside would be if the rise in the unemployment rate and the decline in housing prices were significantly greater than currently expected," he said.

Both officials said they believe this slump will be more pronounced than other historical downturns. They said financial institutions have been unwilling to expose themselves to the mortgage market, and lenders are hesitant to lend to risky borrowers in a declining house price market after the subprime meltdown.

"The housing malaise could be more protracted and the recovery more anemic than we have experienced in previous housing downturns," said Mishkin.

"Unfortunately, we have little historical precedent for sustained declines in national housing prices, which makes it difficult to forecast future home prices," Rosengren added in his speech.

But Rosengren said a solution may not solely be related to monetary policy.

As mortgage rates continue to decline, he said that foreclosures and unemployment should come down with them. He also said that as borrowers shy away from risky subprime loans, they should instead look into FHA loans - home mortgages that allows for a purchase or refinance with a low down payment.

"Examining how FHA programs could continue to be modernized and streamlined and become a more viable choice for borrowers may be an important mitigant for housing problems," said Rosengren.