The Federal Reserve is running the risk of politicizing itself as it makes its way into the housing debate. The effort has included comments sent from officials in the Fed to Congress about the importance of housing to the economic recovery.

The Federal Reserve is making waves in the housing debate.

Such comments may lay the groundwork for evermore quantitative easing, e.g. purchasing mortgage securities. Included in the Fed’s proposal are ideas that may call for more taxpayer funding through Fannie Mae and Freddie Mac.

Although it ventured into the dicey area of employing government-backed entities to bolster housing in the short-term, the Fed steered clear of questions regarding a needed long-term revamp of housing finance. By extension, then, the Fed endorses current state of housing, which is a market almost completely reliant on government backing.

The Fed contends that it may be beneficial to pursue more aggressive action on loan modifications, mortgage refinancing and foreclosed property sales – despite the potential for even more short-term losses for Fannie and Freddie (and through them, taxpayers as well). The Fed’s comments have led many to believe that a new government housing effort was forthcoming.

The Fed has also entered other politically controversial areas such as principal forgiveness for underwater mortgages. The Fed hasn’t taken a specific stance, but maintains that experiments with policy in this area could prove useful.

Some mortgage modifications, according to the Fed, may be beneficial socially even if the lender isn’t benefited personally. This would involve further taxpayer funding and perhaps the overriding of private contract rights.

Banks are traditionally regulated to sell foreclosed homes quickly; but, regulators acknowledge this isn’t always practical. The Fed is now considering providing guidance to banks and regulators that could allow banks to convert some of these foreclosures into rental properties.

It’s hoped that this would stem the flow of foreclosures; albeit with little effect on housing prices.

See also:
2012 Mortgage Refinance Plan
Elimination of Fannie and Freddie: More of The Same?
Relief for Underwater Homeowners Expected from Major Federal Housing Initiative