* Says housing recovery set to strengthen
* Warns tight credit a headwind, says new rules partly to
By Alister Bull
WASHINGTON, March 8 The U.S. Federal Reserve may
consider holding mortgage-backed securities, or MBS, longer on
its balance sheet to minimize market disruption instead of
selling them as it exits easy monetary policy in the future, a
top Fed official said on Friday.
Fed Governor Elizabeth Duke also said the broad recovery in
U.S. housing was likely to strengthen as an improving economy
unleashed pent-up demand, but she warned that tight credit
conditions could be a drag on the upswing.
"The strength of this momentum will be determined by credit
availability to these new households, an availability that may
be much slower to return as mortgage market participants assess
the regulatory, market and economic environment," she said.
Duke reminded a Mortgage Bankers Association conference in
Avon, Colorado, that the Fed decided in 2011 it would sell its
MBS holdings when it eventually tightens monetary policy.
"We might conclude that sales of MBS in volumes sufficient
to meet the parameters of the exit strategy principles might
create significant market disruptions," she said.
In that case, said Duke, the Fed might consider "holding the
securities for longer or allowing them to roll off more
It was the latest remark from a Fed official to indicate
that the idea of not selling bonds from its balance sheet is
under serious consideration and follows comments hinting in a
similar direction by Fed Chairman Ben Bernanke last week.
Policymakers can discuss the topic further when they meet on
March 19 and 20 for a regular assessment of the U.S. economic
outlook and their aggressive actions to boost the economy.
The U.S. central bank is currently buying $40 billion of MBS
every month, as well as $45 billion of Treasury bonds, in an
aggressive bid to support the U.S. recovery.
It has also held interest rates near zero since late 2008
and vows to keep them there until unemployment hits 6.5 percent,
provided inflation stays under 2.5 percent. The U.S. jobless
rate fell to 7.7 percent in February from January's 7.9 percent.
Duke said that an improving economy would help housing make
further gains, but cautioned that credit conditions could
prevent younger people who may have weaker credit scores from
buying a house, restraining an important source of demand.
"I expect demand to come from a pickup in new household
formation, but I also recognize that these households may be the
very population that faces especially tight credit conditions,"
Fed research shows that over half of first-time buyers in
the early 2000s were people with low or middling credit scores,
but many of those people would struggle to get a mortgage in
today's market, she said.
Part of the reason lay in the numerous new financial rules
proposed since the housing market collapse to prevent a repeat
of abusive lending practices that contributed to the subprime
mortgage market crisis.
Duke, a former banker, said no one wanted to return to the
pre-bubble days, but she listed a range of reasons why some of
the proposals would add to the cost of getting a mortgage for
borrowers with weaker credit.
"It will be up to policymakers to find the right balance
between consumer safety and financial stability, on the one
hand, and availability and cost of credit, on the other," she