Confirming what the nation’s home builders have been saying for some time, in a Jan. 4 white paper provided to Congress, the Federal Reserve noted that “restoring the health of the housing market is a necessary part of a broader strategy for economic recovery.”

However, the paper concludes, “there is unfortunately no single solution for the problems the housing market faces. Instead, progress will come only through persistent and careful efforts to address a range of difficult and interdependent issues.”

In the framework it establishes for policymakers to find a pathway that will move housing and the economy forward, the report discusses the impact of today’s tighter mortgage credit standards, as well as options for reducing vacant real estate owned (REO) and reducing defaults and foreclosures.

NAHB Chairman Bob Nielsen said that the Federal Reserve report confirms “that extraordinarily tight credit conditions are preventing creditworthy borrowers from obtaining home loans and this is harming the housing market and the broader economy.”

NAHB’s Economics and Housing Policy Group has posted  a summary of the white paper on Eye on Housing.

In its report, the Fed identifies three key forces within the housing sector that are holding back both housing and the economic recovery:

• Persistent excess supply of vacant homes on the market
  
  
• A marked and potentially long-term downshift in the supply of mortgage credit
  
  
• An unwieldy and inefficient foreclosure process imposing extra costs on home owners, lenders and communities

These three forces have reinforced each other and have led to a continuous flow of foreclosed properties, lower home prices, more mortgage distress and a self-feeding downward spiral, the Fed says.

At the same time, the slow economic recovery has suppressed demand and deflected the natural cyclic forces that normally boost housing.”

The Fed’s paper reviews the dramatic fall in housing prices and resulting share of mortgages underwater.

The collapse caused home buying to plummet, but lenders have tightened credit standards dramatically as well, the paper says.

The Fed report states that "the extraordinarily tight standards that currently prevail reflect, in part, obstacles that limit or prevent lending to creditworthy borrowers.”

Among examples of how the tightening has occurred, lenders are requiring higher credit scores than Fannie Mae and Freddie Mac accept out of fears that the government sponsored enterprises will require the loans to be taken back if they are at all faulty and end up in default or that they will charge higher loan servicing costs.

Data reviewed by the Fed show particular impacts on first-time home buyers, even in parts of the country with lower-than-national unemployment rates.

The Fed paper posits that if the same degree of credit tightness had existed in the past, the country would have a much lower homeownership rate.

The paper states that, "Continued efforts are needed to find an appropriate balance between prudent lending and appropriate consumer protection, on the one hand, and not unduly restricting mortgage credit, on the other hand.”

The paper also discusses the pros and cons of selling more REO properties to investors who would turn them into rentals.

Among the pros of an REO-to-rental program, the excess inventory of for-sale homes would be reduced, the current vacant stock would be maintained and there would be more housing available for households seeking to rent single-family homes.

The paper estimates the current REO supply at 500,000 and expects a flow of 1 million this year and again next year.

That steady flow in foreclosures, the Fed suggests, is keeping prices from rising and reinforcing the trend through additional reductions in home owner equity.

Credit Also Needed for Construction Loans

Nielsen said that policymakers in Washington also need to address the lack of credit extending to housing construction loans, which is crippling the housing industry and preventing construction of new homes in markets that need and want them.

“In scores of markets across the country that are exhibiting signs of job growth and where the inventory of new homes is nearly exhausted, builders should be hiring workers to break ground on new housing developments,” Nielsen said.

Nielsen noted that housing can act as a job catalyst if regulators and lending institutions return to prudent underwriting standards that do not exclude creditworthy borrowers and if they move to restore the flow of credit to viable home building projects.

In normal times, housing accounts for more than 17% of the nation’s economic output. Constructing 100 new homes creates more than 300 full-time jobs, $23.1 million in wage and business income and $8.9 million in federal, state and local tax revenue.

With cash-strapped municipalities across the land desperately searching for new revenue sources, home building can increase the property tax base that supports local schools and communities.

“Removing the obstacles limiting access to mortgage credit and enabling builders to obtain construction loans to build in markets where demand is firming is imperative to get housing back on track, to put our nation back to work and to keep the economy moving forward,” said Nielsen.