Yellen, Powell to Discuss Financial Risks of Hot Home Market

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Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell are slated to discuss the hot U.S. housing market and the risks it could pose to the financial system at a meeting with fellow regulators on Friday.

The aim of the closed-door session: To make sure the U.S. is not vulnerable to a crisis akin to the one it suffered more than a dozen years ago, when the bursting of a property-price bubble drove top banks to the brink of insolvency and the economy into a deep recession.

The meeting of the Financial Stability Oversight Council, or FSOC, that’s headed by Yellen will come on the heels of two days of testimony by Powell to Congress on the Fed’s semi-annual monetary policy report.

Friday’s session will be the first time that Yellen’s FSOC will discuss concerns about the housing market in a substantial way, according to people familiar with the matter. The issue was briefly raised in the previous two meetings, held in March and June, then temporarily set aside, they said.

The Treasury is increasingly aware of the dangers that a sudden relapse in property prices could pose to the economy after a sharp run-up on the back of a low inventory of homes for sale, according to the people familiar with the matter.

But Yellen’s team is confident that any financial stability risks are manageable, the people said.

A Treasury spokesman declined to comment.

Unlike during the housing bubble that crashed in the 2007-09 crisis, the quality of borrowers remains high. Powell has also sounded hopeful that another housing-centric catastrophe can be avoided.

“So many of the financial crackups in all countries, all western countries, that have happened in the last 30 years have been around housing,” he told reporters on April 28. “We really don’t see that here. We don’t see bad loans and unsustainable prices and that kind of thing.”

‘Too Much’

Powell reiterated that assessment in the first of his two days of hearings on Wednesday.

The rise in prices “is not driven by the kind of reckless irresponsible lending that led to the housing bubble,” he said. “Those kinds of things are not happening at least so far.” He said values instead were being driven by strong demand and low mortgage rates, though he allowed that the 15% rise over the past year was “too much.”

Yellen, in a hearing before a House committee last month, highlighted the challenge of housing affordability, without speaking specifically to any financial risks to the run-up in prices.

The memory of the 2007 housing bust has convinced policy makers that it pays to be cautious, especially given all the uncertainties surrounding the economy’s performance coming out of a once-in-a century global pandemic.

Fears of a housing bubble have been fueled by the biggest jump in prices in more than 30 years in the S&P CoreLogic Case-Shiller index of property values.

“This is scary,” former Treasury Secretary Lawrence Summers said on Bloomberg Television on July 2.

Summers, a paid contributor to Bloomberg, also questioned why the Fed is continuing to buy mortgage-backed securities while home prices are skyrocketing.

Some housing experts have played down concerns of another property-driven financial breakdown.

“There are just pockets of high-risk lending around the country,” said Edward Pinto, director of the American Enterprise Institute’s Housing Center. “The rest of the neighborhoods around the country have, relatively speaking, low risk -- much lower than it was” prior to the financial crisis, he said.

But that doesn’t mean there aren’t some financial stability issues associated with housing, said Laurie Goodman, founder of the Housing Finance Policy Center at the Urban Institute.

Achilles’s Heel

At the top of Goodman’s list: the less regulated nonbanks that dominate the origination and servicing of mortgages, but which lack access to liquidity from the government during a crisis.

Read More: Quicken Maintains Top Spot Among U.S. Mortgage Lenders

“FSOC has some homework to do on the financial stability side,” she said.

Besides housing markets, the multi-agency regulatory council is scheduled to discuss the Fed’s stress tests of the nation’s biggest banks and a proposed report on climate-related financial risks on Friday, according to a Treasury Department statement ahead of the FSOC meeting. The session will be the third FSOC meeting since Yellen was sworn in as Treasury chief.

(Updates with Powell comments on Wednesday, in second paragraph after ‘Too Much’ subheadline.)

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