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Fed Governor: Uncertainty Is the Market’s Greatest Hindrance

Uncertainty is the greatest hindrance to housing recovery today, according to ""Federal Reserve Governor Elizabeth A. Duke"":http://www.federalreserve.gov/aboutthefed/bios/board/duke.htm speaking before the ""National Association of Realtors"":http://www.realtor.org/ on ""Tuesday."":http://www.federalreserve.gov/newsevents/speech/duke20120515a.htm

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Duke called on policymakers to ""move forward with the difficult decisions that will affect the future of the mortgage market,"" deeming this the ""most important solution"" to today's struggling market.

While the economy and the housing market are beginning to see some signs of ripening, Duke pointed out that lending remains tight. While part of the tightening is a ""correction for the lax and problematic lending standards"" that were present before the housing crisis, Duke said the uncertainty surrounding the housing market continues to inhibit a healthy level of lending.

Some of the uncertainty stems from macroeconomic factors such as employment and house prices. Unemployed and underwater homeowners are more likely to default on their homes than employed homeowners who owe less than their homes are worth.

The future of these economic indicators is unpredictable.

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In fact, Duke cites a recent survey that projects house prices could rise by as much as 5 percent or fall by as much as 8 percent this year.

However, beyond these economic indicators lie a slew of other uncertainties holding lenders at bay, according to Duke, and these lie in the realm of policy.

In a recent survey, more than half of lenders cited risks associated with future delinquencies ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô such as putback risk ├â┬ó├óÔÇÜ┬¼├óÔé¼┼ô as a reason for being less likely to originate loans in today's market climate, Duke noted.

Currently, the GSEs and their regulator, the ""Federal Housing Finance Agency,"":http://www.fhfa.gov/ are working to develop a standardized strategy for calculating and reducing risk. However, in the meantime, while lenders await the outcome of a new approach, they may be reluctant to originate loans they may have to repurchase should they fall into delinquency in the future.

National servicing standards, talk of new a new servicing compensation model, and the possibility of a cap on the amount of servicing rights that can be counted as regulatory capital are other uncertainties concerning lenders and servicers.

Another great uncertainty is the future role of the government in the housing market and the fate of ""Fannie Mae"":http://fanniemae.com/portal/index.html and ""Freddie Mac."":http://www.freddiemac.com/

""[U]ntil these tough decisions are made, uncertainties will continue to hinder access to credit, the evolution of the mortgage finance system, and the ultimate recovery in the housing market,"" Duke said of all the policy ambiguity.

While admitting these are all important decisions, she stressed that ""the most important prescription for the housing market is for these decisions to be made and the path for the future of housing finance to be set.

""It's time to start choosing that path,"" Duke stated.

About Author: Krista Franks Brock

Krista Franks Brock is a professional writer and editor who has covered the mortgage banking and default servicing sectors since 2011. Previously, she served as managing editor of DS News and Southern Distinction, a regional lifestyle publication. Her work has appeared in a variety of print and online publications, including Consumers Digest, Dallas Style and Design, DS News and DSNews.com, MReport and theMReport.com. She holds degrees in journalism and art from the University of Georgia.
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