by Calculated Risk on 10/21/2011 12:22:00 AM

For discussion ... from the WSJ: Fed Is Poised for More Easing

Federal Reserve officials are starting to build a case for a new program of buying mortgage-backed securities to boost the ailing economy, though they appear unlikely to move swiftly.
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"I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities," Federal Reserve governor Dan Tarullo said in a speech Thursday at Columbia University.

A new Fed mortgage-bond-buying program isn't a certainty.

Here is the speech by Dan Tarullo: Unemployment, the Labor Market, and the Economy

I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities (MBS), something the FOMC first did in November 2008 and then in greater amounts beginning in March 2009 in order to provide more support to mortgage lending and housing markets.
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A large-scale MBS purchase program has many of the benefits associated with purchases of longer-duration Treasury securities, such as inducing investors to shift to other assets, including bonds and equities. But it could also have more direct effects on the housing market. By increasing demand for MBS, such a program should reduce the effective yield on those MBS, which in turn should put downward pressure on mortgage rates. The aggregate demand effect should be felt not just in new home purchases, but also in the added purchasing power of existing homeowners who are able to refinance. Indeed, homeowners who refinance get the equivalent of a permanent tax cut.
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[T]he effectiveness of an MBS purchase program would be amplified, perhaps significantly, if certain nonmonetary policies were changed.

Proposals for promoting refinancing have been made by many academics, policymakers, and policy analysts. Any proposals that could sensibly and effectively be implemented would increase the effect of an MBS purchase program. For example, action could be taken to bring the benefits of refinancing to underwater borrowers. ... In practice, though, numerous obstacles have kept the program from helping many potentially eligible borrowers. Underwater borrowers whose loans are not guaranteed by GSEs are essentially unable to refinance at all. Policy changes directed at this last, larger group of homeowners would have to be carefully designed so as not to transfer credit risk from private investors to the government, and could well require legislation.

And from the WaPo: Bernanke shares concerns on European debt, action on housing

Federal Reserve Chairman Ben S. Bernanke delivered a stern warning Thursday to Senate Democrats regarding the European debt crisis and offered insight into stabilizing the ailing housing market, according to senators and aides who attended the meeting.

... much of the senators’ conversation with Bernanke revolved around “the growing recognition from everyone—economists across the board—that there needs to be some more dramatic action in housing.”

Bernanke declined to answer questions from reporters as he emerged from the Capitol Hill meeting. But, senators said, Bernanke told the caucus that some relief could come next week when the Federal Housing Finance Agency announces new plans to try to enable homeowners who are under water to refinance.