By Ian McKendry

WASHINGTON (MNI) – The Federal Reserve recently-released White
Paper on housing, covered a lot of ground that has been publicly
discussed, but was atypical in the sense that it did not follow usual
Fed disclosure protocol and dabbled in matters usually left to fiscal
policy makers.

“I didn’t really see to much in the White Paper that was very
different from what was said before,” St. Louis Federal Reserve Bank
President James Bullard told reporters in St. Louis Friday.

However, Bullard seemed slightly irked that the paper, a summation
of ideas sent to members of Congress, did not feature any of the authors
names and did not follow normal Fed protocol for releasing papers.

“I would prefer, when we do things like this (that we) put it out
under the authors names and put a disclaimer in the front. That is how
we do all the other papers we do” Bullard said. “There is a way to do
that, I would prefer that we use that method.”

Saying the Fed is often asked about housing, Federal Reserve Chair
Ben Bernanke sent Congress an unsolicited White Paper on the subject,
stressing “the health of the housing market is a necessary part of a
broader strategy for economic recovery.”

The White Paper identified three broad areas that need
congressional attention, the “persistent excess supply of vacant homes,”
the “potentially long-term downshift in the supply of mortgage credit”
and “the costs that an often unwieldy and inefficient foreclose process
imposes on homeowners, lenders and communities.”

The White Paper surveys several problem areas but focuses on one
possible solution it can influence: getting financial institutions that
hold thousands of vacant house to turn them into rental properties, a
process for which there is currently no government or private program.

Chris Low, chief economist at FTN Financial in a research note
suggested that the paper likely had many authors and that it made sense
for the Fed to release a paper analyzing some of the more popular ideas
on how to help the housing market because “Bernanke is a respected
economist and the Fed has hundreds of economists working under him.”

“The paper is not intended to be a list of things to do to fix
housing. Rather, it is intended to be a starting point for a discussion
of housing market remedies by Congress,” Low said.

Conrad DeQuadros, senior economist at RDQ Economics agreed with
that sentiment, telling Market News International that he thinks the
paper may have stirred up more controversy than the Fed intended.

“I think Bernanke is very hesitant to make recommendations on
fiscal issues, and I think that is likely to remain the case, but I
think it is hard for the Chairman when they are looking at issues that
might be headwinds for the economy,” DeQuadros said.

He added, “I don’t think there is suggestion sending this White
Paper to Congress that the Fed is considering or more significant
consideration of QE3.”

However, some lawmakers, notably Orrin Hatch, a Republican Senator
from Utah, interpreted the meaning of the paper’s release a little
differently.

“I worry that the unveiling of your staff’s housing White Paper, to
‘provide a framework for thinking’ treads too far into fiscal policy,”
Hatch wrote in a letter to Bernanke.

The paper explored a number of possible policy measures that could
be taken, including turning GSE owned REO properties into rental
properties, expanding the GSEs role in mortgage refinancing and
principal reductions.

DeQuadros said, “The suggestion of greatest interest is broader
principal reduction which is available through HAMP but is not being
used very broadly.”

According to the most recent data released by the Treasury
Department, roughly 36,000 permanent principal reduction mortgage
modifications have been conducted under HAMP. Fannie Mae and Freddie Mac
currently do not offer principal reductions.

Bullard told reporters he was skeptical of the macroeconomic
benefits of principal reductions and has not seen an analysis that
evaluates the benefits.

“The notion has been that you could have borrowers pick up losses
or you could (have) lenders pick up losses,” Bullard said, adding that
either way someone is incurring a loss.

He also added he would be cautious of expanding the GSEs role in
refinancing mortgages to non-GSE, non-FHA loans that otherwise would be
eligible for HARP modifications — a concept the paper explored.

“I would be wary of expanding the role of the GSEs in housing
markets, I think they have already done tremendous damage and to go
further in that direction seems like inviting further disaster for the
U.S. economy,” Bullard said.

The conversion of GSE REO properties was a concept the FHFA floated
in August when it put out a request for information. The RFI received
over 4,000 responses and according to the White Paper, Fed calculations
show that “many REO properties appear to be viable rental properties.”

FHFA Acting Director Edward DeMarco said in November testimony that
the agency was working on REO-to-rental pilot programs it hoped to
launch in 2012. The White Paper said “An interagency group in which the
Federal Reserve is participating is considering issues related to the
design of a program that would facilitate REO-to-rental conversions.”

While the paper explores a number of possible policy
considerations, most of them would have to be taken on by Congress and
the FHFA.

“When the central bank strays into fiscal policy it gets itself
entangled in politics,” Richmond Federal Reserve Bank President Jeffrey
Lacker said on CNBC last week adding that getting caught up in politics
threatens the Fed’s independence.

“We have to be really careful because of our special
independence,” Lacker said.

** Market News International Washington Bureau: 202-371-2121 **

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