Re/Max Dynamic Agents

  The Federal Reserve began a two-day meeting that’s expected to conclude with the announcement of an unorthodox plan to spark life into the U.S. economy. The Fed has signaled since August that it’ll begin purchasing government bonds in an attempt to drive down the bonds’ yield, or their return to investors. It hopes that by flattening the return that investors can get from the safest investments, they’ll take more risks and lift the economy out of its doldrums.

The dollar is expected to weaken as a result of the Fed’s purchase of two-year and 10-year Treasury bonds. That’ll boost the U.S. economy by making U.S. exports cheaper abroad. The action is also expected to compel similar steps by the British, European Union and Japanese central banks. The risk is that all the new pump-priming may end up igniting inflation down the road.

In normal times, the Fed lowers short-term interest rates as a tool to heat up the economy, or raises them to cool it down. Times are anything but normal, and the Fed’s benchmark lending rate, which influences loan rates across the U.S. economy, has been near zero since 2008.

That’s helped to spur a modest recovery; the massive federal stimulus spending helped too. But unemployment remains near 10%, growth remains weak at best, and there’s little appetite in Congress for additional spending to spur the economy. That leaves the Fed as the only game in town, reaching for an unconventional tool.

“If you have an instrument that could work, you are supposed to use it at times of distress,” said Vincent Reinhart, a former top economist on the Fed’s rate-setting Federal Open Market Committee. “They might not go into it with a lot of confidence, but they recognize that if they were to sit on their hands, the Fed’s reputation could be damaged.”

There’s considerable skepticism about whether the unorthodox step, called quantitative easing, will work.

Many analysts fear it sets the stage for revived inflation, the rise in prices across the economy. Some experts worry that the Fed may not be able to rein in inflation once it reignites, or may face pressure from politicians to tolerate higher inflation rather than dial it back as the economy recovers.

That’s why Federal Reserve Bank of Kansas City President Thomas Hoenig warns that the Fed’s expected action is “a pact with the devil.”

Several Fed leaders have voiced unease with the step, in part because it’s mostly untested.

The Fed purchased more than $1.25 trillion of mortgage bonds during the financial crisis to help knock down mortgage lending rates and stabilize the housing market. It also swelled its balance sheet to more than $1.76 trillion in late 2008 with short-term lending programs to stabilize credit markets during a near-meltdown.

Those actions, though, came during a time when credit markets were impaired. This week’s action comes as financial markets are much healthier, and skeptics abound.

“I don’t think quantitative easing will have much impact on the economy,” said David Malpass, the president of forecaster Encima Global in New York. He added that, “Japan tried this in 2002, with no impact,” referring to that country’s decade-long economic stagnation, like ours brought about by a financial crisis.

“I think everybody at the Fed is aware of that,” said Lyle Gramley, a Reagan-era Fed governor, who doesn’t think the Fed is repeating Japan’s mistakes. “Japan waited much too long to move aggressively. The Fed has moved aggressively since the end of 2008. I think we’ve made more progress in cleaning up our banking situation.”

Gramley, a child of the Great Depression, has a long view. He’s never seen the Fed embark in such an unorthodox way and isn’t sure how successful it’ll be. “I think the candid answer is nobody can be sure. It’s going do some good,” he said, noting that lower lending rates will make it cheaper for businesses to purchase equipment and for consumers to buy homes. “If you are trying to put a magnitude on it, you might get something in the order of half a percent (of additional economic growth) next year, which is certainly not a panacea for our ills. That’s why it is so controversial within the Fed.”

—The U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of the Treasury released the October edition of the Obama Administration’s Housing Scorecard (www.hud.gov/scorecard). The latest housing figures show continued signs of stabilization in house prices and high home affordability due in part to record low interest rates. The housing scorecard is a comprehensive report on the nation’s housing market.

“Over the last 21 months, the Obama Administration’s swift action in the housing market has kept millions of families in their homes and provided responsible borrowers with incentives to refinance or to become a homeowner,” said HUD Assistant Secretary Raphael Bostic. “But, with many unavoidable foreclosures still in the pipeline, it’s clear that we have a hard road ahead. That’s why we’re focused on successfully implementing the programs we’ve put in place—such as additional assistance on refinancing and helping unemployed homeowners stay in their homes—and ensuring that help is available to homeowners as soon as possible.”

“HAMP is not only an important part of the Administration’s efforts to stabilize the housing market, it has also redefined the loan modification standard for the mortgage industry overall. That has led to more than 3.5 million modification arrangements directly benefitting families in communities across the country still healing from the crisis,” said acting Assistant Secretary for Financial Stability Tim Massad. “Early data shows that well beyond the trial phase, the majority of homeowners are maintaining their HAMP modifications, reflecting the rigorous standards the program uses to provide assistance to responsible homeowners.”

The October Housing Scorecard features key data on the health of the housing market including:

-Families continued to benefit from the lowest rates in history on 30-year fixed mortgages. Since April 2009, record low interest rates have helped more than 7.1 million homeowners refinance, resulting in more stable home prices and $12.7 billion in total borrower savings.

-As expected with the expiration of the Home Buyer Tax Credit, new and existing home sales remained below levels seen in the first half of 2010. At the same time, home prices remained level in the past year after 33 straight months of decline and homeowners added $95 billion in home equity in the second quarter.

-More than 3.52 million modification arrangements were started between April 2009 and the end of August 2010—nearly triple the number of foreclosure completions during that time. These included more than 1.3 million trial Home Affordable Modification Program (HAMP) modification starts, more than 510,000 Federal Housing Administration (FHA) loss mitigation and early delinquency interventions, and more than 1.6 million proprietary modifications under HOPE Now. While some homeowners may have received help from more than one program, the number of agreements offered nearly tripled foreclosure completions for the same period (1.3 million).

-At nine months, almost 90% of homeowners remain in their permanent HAMP modification, with 11% defaulted. Early data indicate that HAMP permanent modifications are performing well over time, with lower delinquency rates than those reported by the industry at large. At nine months, less than 16% of permanent modifications are 60+ days delinquent.

Data in the scorecard also show that the recovery in the housing market continues to remain fragile. For example, foreclosure completions continue to move upward and a large supply of homes are being held off the market. While the recovery will take place over time, the Administration remains committed to its efforts to prevent avoidable foreclosures and stabilize the housing market.

For more information, visit www.hud.gov.