U.S. Tackles Housing

By NICK TIMIRAOS The Wall Street Journal
The Obama administration is ramping up talks on how to revive the housing market, which is weighing on the economic recovery—and possibly the president's re-election in 2012.
Last year, advisers considered several housing-policy prescriptions but rejected them in favor of letting the market sort things out. Since then, weak demand and a stream of foreclosed properties have put renewed pressure on home prices, prompting concern within the White House.
Housing "hasn't bottomed out as quickly as we expected," President Barack Obama said at a White House town hall last week. Mr. Obama said housing remained the "most stubborn" problem facing the country and conceded that a raft of federal mortgage-aid programs were "not enough, and so we're going back to the drawing board."
Policy ideas include having taxpayer-owned mortgage giants Fannie Mae and Freddie Mac relax their rules for loans to investors, allowing those buyers to vacuum up excess housing inventory. In certain markets, Fannie and Freddie could hold some foreclosed homes off the market and rent them out to ease the property glut.
Officials also could sweeten incentives for banks to reduce loan balances for borrowers who are underwater, or owe more than their homes are worth.
Discussions are in early stages, and there isn't consensus around particular ideas. A spokeswoman said the president and his advisers "are always looking at new ways" to strengthen the housing market but wouldn't disclose details. "While we continue to consider the options available to us, it would be inaccurate to say we are proposing any of these particular ideas at this time," White House spokeswoman Amy Brundage said.
Home-buyer tax credits worth up to $8,000 in 2009 and 2010 gave a short-term boost to home sales, but demand plunged after they expired. Foreclosures have put pressure on prices and damped residential construction, traditionally an engine of job growth during economic expansions.
"As conditions change, some options that were below the line the way the market was 18 months ago might be above the line today," said Peter P. Swire, who teaches law at Ohio State University and until last year was a top housing adviser to the White House.
Most of the administration's housing efforts have focused on helping borrowers refinance or modify their loans to avoid foreclosure. But some economists say too many borrowers won't be saved through loan workouts and that the administration must do more to soak up the flood of foreclosures by boosting housing demand.
President Obama's signature loan-modification program, announced during his first month in office, has lowered payments for around 600,000 borrowers. Meanwhile, around four million borrowers are in foreclosure or have missed three or more consecutive mortgage payments. While mortgage-delinquency rates have fallen, millions more remain at risk of defaulting if they experience a payment shock because they owe more than their homes are worth.
More recent housing relief has targeted unemployed borrowers. Last week, officials said unemployed borrowers with loans backed by the Federal Housing Administration could miss up to 12 months of payments while they look for new jobs. A separate $1 billion program is set to begin providing interest-free loans of up to $50,000 for temporarily jobless borrowers this month.
Unlikely to get Congress to provide additional funds, the administration is left to examine options that it can implement without congressional consent. Fannie and Freddie, the so-called government-sponsored enterprises or GSEs, could be one policy lever. "There are a number of things that we can look at on the GSE side," said Austan Goolsbee, departing chairman of the Council of Economic Advisers.
Last year, officials considered a range of policies that included allowing borrowers with loans backed by Fannie and Freddie to refinance more easily by relaxing fees that lenders are charged for riskier borrowers. Others outside the administration have pushed for federal entities to lend more freely to mom-and-pop investors or to create public-private initiatives that would allow institutional investors to buy more foreclosed properties. "Because we have limited credit availability, we need investors to help soak up the supply," said Ivy Zelman, chief executive of housing-research firm Zelman & Associates.
Fannie and Freddie also could rent, instead of sell, some of their huge inventory of foreclosed homes, which could take some pressure off prices. The firms owned about 218,000 properties at the end of March, and sold around 100,000 during the first quarter, or more than one-third of all foreclosed property sales, according to analysts at Barclays Capital. The firms could take back as many as 700,000 homes over the next year, according to estimates by economists at Goldman Sachs.
That idea has generated interest among some housing officials but could meet resistance from Fannie and Freddie's independent federal regulator. Renting out homes hasn't been tried on a wide scale and is "riddled with risk," said Ed Delgado, a former Wells Fargo executive who leads the Five Star Institute, a mortgage-industry group. "Essentially you're converting the [firms] from providing liquidity to a glorified national landlord for distressed assets."
All these options could boost lending and attack the overhang of foreclosures, but would put more risk on federal agencies and Fannie and Freddie. The mortgage giants have cost taxpayers $138 billion and counting.
They also would require the blessing of the Federal Housing Finance Agency, which is charged with limiting losses at Fannie and Freddie. The FHFA last year refused to go along with an Obama administration initiative to reduce loan balances for certain borrowers who were current on their mortgages but heavily underwater. The agency has typically resisted programs which produce substantial, upfront losses designed to offset potentially larger but harder to quantify long-term losses.
The same skepticism that prompted advisers last year to push for giving the market room to heal on its own could prevail once again. Simply focusing on the broader economy is "one of the best things we can do for the housing market," Mr. Goolsbee said.
Still, the high-level housing discussions are significant because Mr. Obama hasn't put much emphasis on his housing policies over the past year. The administration has taken fire from both sides over its housing-relief plans, with Democrats saying the administration has let banks off too easily while Republicans have said the programs wasted money. The housing market could be a top election issue for voters in swing states such as Florida, Ohio, and Nevada. http://professional.wsj.com/article/SB10001424052702304584404576440033488980192.html
TORONTO (Reuters) - The Bank of Canada will raise interest rates sometime in the fourth quarter as a sturdy, if unspectacular, domestic recovery offsets global headwinds, according to a Reuters survey.
The median forecast of a July Reuters poll of 37 economists and strategists pushed back previous rate hike forecasts of a third-quarter increase projected in a May poll.
The central bank is now seen holding its key policy rate at 1 percent in the third quarter.
Of those still expecting a third-quarter increase, all of them predicted a 25 basis point rise in September . None expect a hike next week at the central bank's July 19 rate decision.
The poll was conducted between July 8 and July 12.
While some recent Canadian economic data has been encouraging, it comes against a bleak global backdrop. Worries have spread about the euro zone debt crisis and there are signs of a stagnating recovery in the United States, Canada's largest trading partner.
U.S. job growth is a key focus, since its impact on U.S. consumer spending spills into the Canadian market.
"The soft patch that we obviously have in the U.S. right now we believe will prove temporary, that we'll get a little bit of a lift in the second half of the year," said Michael Gregory, senior economist with BMO Capital Markets.
"It does seem that Canadian growth continues to chug along, the output gap continues to close. If anything, I think the output gap may be even a little smaller than what the Bank of Canada is even estimating ... so that all points to the need to try and ratchet rates higher. They can't really wait until the Fed starts to go."
Canada was the first Group of Seven country to raise interest rates following the global financial crisis in 2008, lifting its target for the overnight rate three times last year before pausing.
RATE SEEN AT 1.50 PCT AT END OF Q4
The median forecast also showed that the bank would end the fourth quarter with the key rate at 1.50 percent, down from 1.75 in the previous poll. The rate was seen ending 2012 at 2.50 percent, down from 3 percent.
Analysts said a rate increase would likely send the Canadian dollar -- already a point of concern for the central bank -- higher, which could result in another rate hike pause. The currency is currently above parity with the U.S. dollar, trading around $1.04.
The poll, which showed 16 of 37 forecasters expect the central bank to start raising rates in the fourth quarter, echoed the results of a poll of primary dealers conducted on June 29, which found most had pushed back their forecasts as well.
Two primary dealers -- the institutions that deal directly with the central bank as it carries out monetary policy -- have pushed their targets into 2012.
"It's a tough call, but our view is they're likely to wait until early next year and then gradually raise interest rates at that point," said Adrienne Warren, a senior economist at Bank of Nova Scotia.
"Certainly, the path will be contingent on the performance of the U.S. economy ... There's so much uncertainty out there in the economic outlook right now. Sentiment can change quite easily over the next few months in either direction."
In the current poll, five of 11 primary dealers surveyed expected the first rate hike to come in the third quarter, compared with 10 in May's poll. Four predicted a hike in the fourth quarter.
BMO Capital Markets pushed its expectations for the first increase to the fourth quarter from the third. Desjardins Securities was unavailable as it was currently revising its forecasts.
Overnight index swaps, which trade based on expectations for the key central bank policy rate, showed investors see only a slim chance of a rate hike this year.
One concern for the Bank of Canada is recent data that showed inflation rose to 3.7 percent in May, its highest level in more than eight years. That was well above expectations and far above the central bank's 2 percent target.
Citi , one of the forecasters, said it pushed back its expectations of a rate hike to October from July, despite the data.
"Despite the swell in May consumer prices, our change reflects the temporary lull in Canadian economic growth, as well as ongoing uncertainty surrounding the sovereign debt crisis in Greece, and upcoming debt ceiling and budget showdowns in the United States," Citi said. http://ca.finance.yahoo.com/news/Bank-Canada-seen-raising-reuters-1111903773.html