Federal Reserve Chairman Ben Bernanke will address Congress tomorrow for the first time since last week’s release of a new Federal Open Market Committee statement that expressed uncertainty about the direction of the economy and federal economic policy. His appearance before the Joint Economic Committee comes in the wake of Monday’s announcement that new home sales have dropped to their lowest levels in nearly seven years—a slump made more serious in the context of recent reports showing rising rates of subprime mortgage foreclosures.
The Joint Economic Committee will no doubt ask Bernanke for his views and guidance on the foreclosure crisis, and they should pay particular attention to its relationship to the housing market downturn. Last year saw a 42 percent increase in the number of foreclosure filings, and in the subprime market alone, 2.2 million families are currently in danger of losing their homes. With spending on new homes and home improvements also seeing its sharpest decline in 15 years, the housing market is in danger of further downturn if an influx of foreclosed homes floods the market.
Center for American Progress Senior Fellow Christian E. Weller explains in “The End of the Great American Housing Boom” that these market forces will create severe financial strains for homeowners as home sales slump, diminishing their ability to sell their homes and then buy newer, bigger ones. Less economic activity in the important housing sector will lead to less consumption as homeowners rein in their spending, and lower employment in industrial and service sectors that thrived during the housing boom, which in turn points to slower economic growth.
When Bernanke answers questions about the impact of slowing new home sales on economic growth, congressional panel members should probe how the Fed chairman plans to adjust interest rates to cope with the housing slump. But they should also ask him about the easy lending terms and relaxed standards that helped fuel this most recent boom in the subprime market and are perhaps the most to blame for the subsequent bust. This question is important not only to consumers and borrowers, but also to the investing community, which feverishly bought up subprime mortgage backed securities. Congress needs to know how the Fed plans to monitor the debt markets and hold lending institutions responsible for their risk through oversight and prudential regulation.
More immediately, however, Congress needs to ascertain Bernanke’s views on the foreclosure crisis facing so many American families in order to craft an appropriate legislative response to the crisis. The Center for American Progress earlier this month released a report on subprime mortgages that outlines effective avenues for policy action, including:
- Providing federal grants to expand and enhance current mortgage assistance and foreclosure prevention programs and low-interest mortgage assistance to eligible borrowers.
- Allotting federal funds to target key cities and states facing the highest risk of mass foreclosure.
- Including provisions to ensure federal agencies assess the effectiveness of each program every three years.
- Strengthening programs that aid families while their mortgage contracts are renegotiated or the property is sold on the market so that the homeowners’ credit ratings are salvaged, allowing for the possibility of future homeownership.
Congressional policymakers and Bernanke together need to prepare now for the foreclosure crisis to help embattled homeowners and help protect the broader economy from the housing downturn. Many middle class families, hampered by low wage growth and rising personal debt, never fully shared in the benefits of economic growth over the past few years. And without action from Congress, the American dream could be pushed further out of reach.
For more information on the Center for American Progress’ take on the housing market, see:
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