Federal Reserve Wake up Call! Finally looking out for the little guy

Up until now the Fed has kept their fingers out of the housing market, but even they now realize the far-reaching impact the foreclosure crisis is having on the overall economic climate. In the white paper they offer up several suggestions, such as reducing the barriers to converting foreclosed homes into rental properties, and loosening the grip on lending standards in order to help the market recover.

The Fed now wants harsher action from Congress on America’s top lenders, and Governor Sarah Bloom Raskin even told a conference at the Association of American Law Schools that the Fed “must impose penalties for deficiencies that resulted in unsafe and unsound practices.”

It must be time to check our subscriber list to the South Florida Law Blog, because it sure looks like our friends at the Fed are on it!

We’ve suggested for a while now that turning foreclosed homes into rental properties is an obvious and logical step. For years banks have collected homes like animals in Noah’s Ark, and now it’s time to put this inventory to good use. 60 Minutes showed us what happened when these homes go empty, so why not put good people in these homes! The government may not like the idea of becoming a landlord, but really isn’t it better than the alternative!! This mass inventory of foreclosed homes can be an asset for our government if more of them are rented out, instead of being a detriment.

The Fed has also come to the overdue realization that the banking system just wasn’t prepared to handle the massive upswing in delinquent homeowners they’ve seen in the last few years. In their report they talk about principal reduction as one such way to combat the negative equity many homeowners now have (which is one of the many reason loan modifications have failed to catch on)

In their report the Federal Reserve states that principal reduction can improve “a household’s financial position, and thus increasing its resilience to economic shocks, and by reducing the incentive to engage in “strategic” default”. Well there’s a DUH moment. We don’t see the market stabilization occurring unless the banks offer principal reduction to homeowners. Right now too many homeowners are walking away, and that won’t change unless they are given greater incentive to stay. The potential impact on the economy could be far reaching if enough homeowners are given the option. It could lead to more stable neighborhoods, more jobs, and the recovery the government has long sought.

It’s nice to see the Fed finally(!) looking out for Joe Homeowner. While the Federal Reserve may have been created to protect Middle America, we all know the Fed has really been about protecting its own, and allowing the banks to essentially bail themselves out. The Fed, as much as they may hesitate to admit it, can’t do their job without the people!