Another Plan to Ease the Pain

The Fed pushes for mortgage reform as housing keeps sinking


Better late than never, one supposes. In a year-end push, the world's economic heavyweights unveiled just how they plan to help America—and the global economy—endure the housing bust and the chaos it unleashed in credit markets. Proposals are flying as regulators, central bankers, and policymakers shift into rescue mode.

Following on the White House plan to freeze some resets of subprime mortgage rates for five years, Federal Reserve Chairman Ben Bernanke outlined a proposal to rein in the worst abuses of dodgy subprime lenders. It would force lenders to consider borrowers' ability to repay loans and verify their assets.

"Long overdue and largely symbolic," says economist David Rosenberg of Merrill Lynch, noting that banks are already shoring up lending standards. Sen. Christopher Dodd, a Fed critic and chairman of the Senate Banking Committee, argued for tighter restrictions on lenders, calling the plan "a significant step backwards."

Flood of cash. At the same time, more pressing worries in fearful credit markets are drawing the attention of the world's central banks. Building on earlier efforts to increase liquidity, the European Central Bank announced more than half a trillion (that's right, trillion) dollars in new lending for the final two weeks of 2007. The huge amount surprised markets but managed to bring down short-term rates as bank borrowers and lenders breathed a sigh of relief.

But at the core of all this is the housing market and mortgage mess. Unfortunately, despite scurrying in Washington and international financial capitals, there is little doubt that the U.S. housing market will remain dismal in 2008. The glut of unsold homes sitting on the market is the largest since 1985. Sentiment among builders is at its lowest level in nearly 22 years, and that bit of winter depression could turn to panic this spring if buyers remain scarce during the year's most important selling season. Foreclosures hit an all-time high in the third quarter and are likely to rise next year, as are loan losses for lenders. Prices continue to cool. However, November housing starts managed to move sideways for a third month, offering some hope of stabilization. "With respect to sales, I think we may be scraping bottom right now," says Richard DeKaser, chief economist at National City. "With respect to construction activity [and prices], we still have a ways to go."

If consumer spending holds up over the next several months, the United States could avoid what are now even odds of a recession. Even so, relief from a long housing-inspired headache may not be at hand. But as government and industry fixes take hold, home inventories get absorbed, and credit improves, this time next year things could be much brighter.

Federal Reserve
subprime mortgages
  • Kirk Shinkle

    Kirk Shinkle is a senior editor for U.S. News Money and manages the Best Funds portal. Follow him on Twitter @KirkS or email him at