A Stable Housing Market is Vital to Our Economic Recovery

By: Sheila C. Bair*

Boston Globe, 5/19/2009 -- During the housing boom, the combination of lax credit standards and rising home prices was unsustainable. That cycle is now being followed by one of distressed mortgages and falling home prices. Stabilizing housing and mortgage credit must be part of our overall response to problems in our financial system and economy.

One way to pare excess homes on the market is to prevent unnecessary foreclosures by modifying distressed loans. This is what the FDIC did for more than 14,000 borrowers at IndyMac Federal Bank, and what the president seeks to accomplish on a wider scale. Keeping families who are paying their mortgages in their homes prevents distressed sales that drive down home prices, and helps avoid the high costs of foreclosure.

We also need to restore the flow of credit, on more reasonable terms, to people who want to buy homes. All of the government's financial stabilization policies are aimed ultimately at making credit more available. The FDIC continues to work with the Federal Reserve and Treasury to shore up bank capital and funding, and deal with troubled assets on bank balance sheets. There is a lot more to do, but we're making progress.

We also need a new regulatory approach that does a better job of protecting consumers and aligning the interests of borrowers, lenders, and mortgage investors. Lenders and regulators will have to work together to arrive at best practices that everyone understands and perceives as fair.

For many years, America's mortgage finance system was the envy of the world, with simple, long-term mortgage instruments that created stability for our families and our communities and served as the foundation for a remarkable period of economic growth. The sooner we get back to basics, the sooner prosperity will return.

*Sheila C. Bair is chairman of the Federal Deposit Insurance Corp., an independent agency charged with maintaining confidence and stability in the nation's banking system.