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Fed's Housing Fix Means Everyone Loses

Bank of America (BAC - Get Report), JPMorgan Chase (JPM) and Wells Fargo (WFC - Get Report) are the biggest mortgage originators in the country.

The Fed also urged policy makers to find a balance between "prudent lending and appropriate consumer protection" on one hand and "not unduly restricting mortgage credit" on the other, suggesting that the current tightness in mortgage credit might be overdone.

"Policymakers should recognize that steps that promote healthier housing and mortgage markets are good for safety and soundness as well," the paper argued.

The paper does not address the fate of Fannie Mae (FNMA.OB) and Freddie Mac (FMCC). Instead it makes a case for the agencies to take further action to boost the recovery in the market even if it means further losses to taxpayers in the near term.

"In many of the policy areas discussed in this paper--such as loan modifications, mortgage refinancing, and the disposition of foreclosed properties--there is bound to be some tension between minimizing the GSEs' near-term losses and risk exposure and taking actions that might promote a faster recovery in the housing market," the Fed wrote. "Nonetheless, some actions that cause greater losses to be sustained by the GSEs in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery."

The Fed also suggested that banks actively consider alternatives to foreclosures such as deeds-in-lieu of foreclosure or short sales, which can help reduce transaction costs and minimize negative effects on communities.

The central bank warned that failure to take action would mean the adjustment process in the housing market will take longer adding to "deadweight" losses, pushing house prices lower and prolonging the downward pressure on the wealth of current homeowners and the resultant drag on the economy at large.

--Written by Shanthi Bharatwaj in New York

>To contact the writer of this article, click here: Shanthi Bharatwaj.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.
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