Fed Chairman Ben Bernanke

Thanks to “extraordinary market conditions” the Federal Reserve officially approved banks’ strategy to rent out foreclosed homes yesterday, the Wall Street Journal reported. Outside those conditions, lenders have to demonstrate a legitimate effort to sell repossessed properties. But recognizing the state of the rental market and the sales market, the Fed and banks have been strategizing for months on how to rent out the bevy of foreclosures backlogging the market. [more]

From left: Federal Reserve Chairman Ben Bernanke and Senate Banking Chairman Tim Johnson

Though the federal government has repeatedly attempted to work its way out of the housing market, Federal Reserve Chairman Ben Bernanke yesterday called for more public support for the market, which he said was a critical component of a broader sustained economic recovery. Outlined in a 26-page paper the Fed sent to Congress, Bloomberg News reported that support could include cutting mortgage obligations for U.S. homeowners, making taxpayer-supported Freddie Mac and Fannie Mae more susceptible to losses. [more]

Federal banking regulators are examining whether the nation’s largest mortgage companies — including Bank of America and Ally Financial’s GMAC — cut corners on their own procedures when they foreclosed on people’s homes, Federal Reserve Chairman Ben Bernanke said today. Preliminary results of the review are expected to be released next month, according to CNBC. “We are looking intensively at the firms’ policies, procedures and internal controls related to foreclosures and seeking to determine whether systematic weaknesses are leading to improper foreclosures,” Bernanke said. “We take violation of proper procedures seriously.” See video above for more. 

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Commercial real estate losses are the biggest worry for the country’s banks this year, though the damage is expected to be concentrated amongst smaller lenders, according to a review by U.S. bank examiners. “Hundreds of banks will fail or will be resolved over the course of the cycle,” said Eugene Ludwig, former Comptroller of the Currency and Chairman of financial consulting firm Promontory Financial Group. While the financial system is unlikely to collapse under the weight of commercial real estate debt, loan defaults on malls, hotels and multi-family housing will slow the recovery process, analysts said, because the smaller lenders who made the bulk of these loans will be forced to tighten credit in order to absorb losses. Federal Reserve Chairman Ben Bernanke has said tight credit is a “formidable headwind” on the road to recovery. The Fed plans to complete its purchase of $1.43 trillion in mortgage-backed securities and residential mortgage debt by the end of March, though some analysts cautioned against an end to that program, especially if mortgage interest rates rise above 6 percent. [Bloomberg via Businessweek]

Reuters’ Matthew Goldstein argued that Federal Reserve chairman Ben Bernanke is becoming a “landlord of struggling strip malls across America,” the result of taking on $29 billion in troubled assets from Bear Stearns last year, in a column yesterday. As the Fed struggles to recoup its losses from the foreclosed Crossroads Mall in Oklahoma City, for instance, where the operators defaulted on a $76 million commercial mortgage, it faces a mess of costly litigation in federal court in New York. Meanwhile, the mall, for which the Fed paid $11.2 million, is back on the market with an asking price of $24 million. Two additional lawsuits have emerged from the bankruptcy of Extended Stay Hotel, which had received $900 million in financing from Bear Stearns. In one, a subsidiary of the Carlton Group, a New York-based real estate firm that also lent to Extended Stay, is suing the Fed, Bank of America and Wachovia for colluding and conspiring against the group’s interest in the weeks leading up to the bankruptcy filing. To avoid getting lost in complex litigation, Goldstein argues, the Fed should strike a deal with JPMorgan and rid itself of the Bear Stearns portfolio.

The Federal Open Market Committee will conduct a two-day meeting today and tomorrow to discuss the Federal Reserve’s two dueling goals: securing the banking system and encouraging economic recovery. Bank lending decreased for five consecutive weeks through Sept. 9, due in part to the Fed’s mandate that banks implement stricter standards for borrowers. But while this decrease in lending could shore up capital and strengthen banks, it could have a negative effect on real estate and construction — two industries that some feel are integral to widespread economic recovery. “While it is important […] that lenders provide credit to worthy households and businesses, they also must maintain enough capital to withstand losses — even if economic conditions turn out to be worse than anticipated,” Janet Yellen, San Francisco’s Fed president, said. “The financial system is still far from healthy and tight credit is likely to put a damper on growth for some time to come.”

CNBC’s Erin Burnett led a discussion yesterday on why the housing market could be Fed Chairman Ben Bernanke’s biggest challenge to economic recovery. Citing a comment from Case-Shiller co-creator Robert Shiller, in which the Yale professor predicted that home prices would increase by just 6 percent in the next five years, CNBC correspondent Diana Olick commented that the housing market outlook could be even bleaker. “Three factors were left out [of Shiller's report] that could be actually juicing the numbers to the upside,” Olick said, referring to the first-time homebuyer tax credit, the second-quarter foreclosure moratorium, and the fact that Shiller’s data was not seasonally adjusted. Bianco Research CEO James Bianco agreed that the market future could be rougher than thought. “The low-end home prices are really moving up,” Bianco said, but added that this was largely due to the $8,000 tax credit for first-time buyers. “The middle- and high-end [are] not moving up. What happens when those tax credits come off and the moratoriums come off — does the market sink back down?” [more]

With landlords having troubles refinancing and $165 billion in commercial loans coming due this year, the commercial real estate market is likely to pose major problems to the recovery of the overall economy, Bloomberg News reported. At a meeting this afternoon, Fed Chairman Ben Bernanke and his colleagues are expected to talk about the uncertain future of commercial real estate. Term Asset-Backed Securities Loan Facility program and treasury purchases are set to appear on the agenda. After being expanded in June to cover commercial real estate, the TALF program is set to expire December 31, but many lawmakers are pushing to extend it for another year.

Federal Reserve Chairman Ben Bernanke said a potential wave of
commercial real estate defaults may present a challenge for the economy
and urged lenders to modify problem mortgages to avoid defaults.
Federal policy makers will extend the TALF, which began accepting
commercial mortgage-backed securities as collateral last month, if they
feel that the financial markets are still “some distance from normal
operation,” Bernanke said. Since the peak of the market, commercial
property prices have fallen 35 percent and more than $108 billion worth
of commercial properties are now in default, foreclosure or bankruptcy,
according to reports by Moody’s Investor Services and Real Capital
Analytics. Comments

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Federal Reserve Chairman Ben Bernanke’s efforts to bring down borrowing
costs to revive the housing market and help the economy are stalling.
Mortgage rates have risen almost to where they were in March before the
30-year rate fell to a record low and sparked a refinancing boom.
According to Bankrate.com, the average 30-year fixed mortgage rate rose
to 5.27 percent yesterday. During the first quarter, mortgage
delinquencies rose to a record 9.12 percent of U.S. home loans, and
home prices dropped. “Housing is not going to be the engine to get us
out of this recession,” said Robert Eisenbeis, former research director
at the Federal Reserve Bank in Atlanta. [more]