So it appears Uncle Ben a/k/a Fed Reserve Chairman Ben Bernanke finally gets it: to fix the U.S. economy, you need to fix housing. The trouble is the Fed’s remedy of buying $40 billion worth of mortgage backed securities each month may not do the trick.
Bernanke argues that buying MBS will push mortgage rates even lower–something that will spur loan refinancings and make it easier for people to buy a home. He believes a rush of new home buying will spur home construction and create job, jobs, jobs.
It sounds good. But the problem is the housing market is not suffering from high interest rates. With the 30-year mortgage rate already down to around 3.65 %, it’s not interest rates that’s keeping the housing market from taking off. Two years after the recession officially ended, far too many homeowners are still weighed down by debt–especially mortgage debt.
Even lower mortgage rates will not help people with a poor credit rating to buy a home. And low mortgages don’t help the millions of homeowners who are underwater on their mortgages to refinance. Similarly, low rates don’t encourage banks or the FHFA to engage in meaningful principal reductions for cash-strapped borrowers.
The Fed chairman could have used his Thursday press conference to jawbone opponents of principal reductions on Wall Street, Capitol Hill and at the FHFA–the regulator of Fannie and Freddie. While Bernanke has no power to force Wall Street or the FHFA to cut mortgage debt for cash-strapped homeowners, he could use his bull pulpit to lobby for it.