Fed’s Rosengren Calls for ‘Concerted’ Fiscal, Monetary Policies

By Anthony Massucci and Craig Torres

Jan. 9 (Bloomberg) -- The U.S. government needs to pursue “concerted” fiscal and monetary policies to revive housing finance, Federal Reserve Bank of Boston President Eric Rosengren said.

“We have seen improvements of late in the functioning of many short-term credit markets” as the Fed cut interest rates, Rosengren said yesterday. “However, many interest rates remained relatively unresponsive.”

Stabilizing home values and restoring housing finance may be prerequisites to ending the longest recession in a quarter century, according to several economists. Home prices continued to fall, unemployment rose and the economy decelerated faster in the last quarter of 2008 after interest-rate cuts and about $1 trillion in fiscal and monetary support for the financial system.

The Federal Open Market Committee cut the benchmark lending rate to a range of zero to 0.25 percent Dec. 16. Still, “it seems that improving housing finance is likely to take concerted fiscal and monetary policy actions,” Rosengren said in a speech to the Massachusetts Mortgage Bankers Association annual dinner in West Newton, Massachusetts.

On the fiscal side, Fannie Mae and Freddie Mac could help provide a secondary market for mortgages “that reflect the lower cost of funds in many credit markets,” Rosengren said.

U.S. Treasury Secretary Henry Paulson said on Jan. 7 that Congress could, under existing authority, use the two government-sponsored enterprises, or GSEs, to make large purchases of mortgages at a targeted rate of 4 percent.

Encourage Borrowing

The central bank, seeking to spur mortgage lending, has begun a program to purchase $600 billion in mortgage-backed securities and agency bonds by June.

“Expansion of this effort, and encouraging greater GSE participation, should encourage borrowers that have equity and reasonable credit scores to purchase or refinance homes,” Rosengren said.

The average rate on a 30-year fixed-rate mortgage dropped for a 10th week to 5.01 percent yesterday, the lowest on record, according to McLean, Virginia-based Freddie Mac.

Fed policy makers have expanded the central bank’s total assets by $1.25 trillion to $2.14 trillion over the past year by increasing loans to banks and corporations through purchases of bonds and other credits in various industries, firms and markets.

“Inflation concerns aren’t going to be as great as concerns about deflation or about concerns that the economy might be quite weak,” Rosengren said in response to an audience question.

Erasing Equity

Falling home prices are erasing homeowner equity, making it difficult to refinance loans. The S&P/Case-Shiller index, which tracks home prices in 20 U.S. metro areas, slid 18 percent in the 12 months to October, after dropping 17.4 percent in the year through September. The gauge has declined every month since January 2007.

One in 10 U.S. home loans were delinquent or in foreclosure in the third quarter of last year, according to Mortgage Bankers Association data.

Many homebuyers with low credit scores can’t get access to credit, Rosengren said. The government could supplement credit for borrowers “facing severe but temporary” financial setbacks by encouraging loan modifications or providing temporary loans or grants, Rosengren said.

Financial institutions have reported $1 trillion in credit losses and writedowns since the credit crisis began in 2007.

Macroeconomic Advisers LLC, a St. Louis forecasting firm, expects growth to contract at a 5.8 percent annual rate in the fourth quarter of 2008, and at a 3.5 percent rate in the current quarter.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Anthony Massucci in New York at amassucc@bloomberg.net.