1. Central Banks and Housing Markets KAREN PENCE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Note. The views in this presentation are mine alone and not necessarily those of the Board of Governors or its staff.

2. Why do central banks care about housing markets?

3. Housing is an important part of the business cycle Source. Janet Yellen, “A Painfully Slow Recovery for America’s Workers,” speech, February 2013

4. Mortgages are large components of bank balance sheets Source. Financial Accounts of the United States.

5. Land prices and mortgage credit are crucial to financial stability

6. What tools do central banks have to influence housing markets?

7. How central banks affect housing: monetary policy  Lowering interest rates makes housing more affordable and stimulates demand for housing  Traditionally the Federal Reserve has targeted the Federal Funds rate, which is the rate at which banks lend money to each other overnight way  More recently, the Federal Reserve has targeted longer-term interest rates through its purchases of mortgage-backed securities  Federal Reserve research suggests that these purchases have lowered mortgage rates by 25 to 40 basis points (Hancock and Passmore)  Tight mortgage credit conditions may have reduced the number of households who have benefited from this policy

8. The Federal Reserve holds $1.7T in mortgage-backed securities QE 1

9. How central banks affect housing: regulatory policy  Commercial banks are involved in all aspects of mortgages:  Origination  Servicing  Holding  Bank regulation is split among multiple regulators in the United States  The Federal Reserve is the regulator for banks (or their holding companies) that originate about 55 percent of mortgages  Safety-and-soundness responsibilities include monitoring lending activity and exposure; management of credit, market, liquidity, and operational risks; and adequacy of loan loss allowances

10. Most mortgages in the U.S. are not held by banks Source. Financial Accounts of the United States.

11. How central banks affect housing: financial stability policy Source. Cerutti, Claessens, and Laeven (2015)

12. U.S. macro-prudential policy  The Federal Reserve does not have the authority to set loan-to-value ratios or debt-to-income ratios for all mortgages  The Federal Reserve has focused on ensuring that the financial system overall is more robust and better able to resist shocks  Stress tests ensure that large banks have enough capital to withstand drops in house prices  Higher capital and liquidity requirements  The countercyclical capital buffer – out for comment until February 19 – can be activated in cases when housing seems overvalued  The Federal Reserve is a member of the Financial Stability Oversight Council, and regulates institutions that FSOC deems systemically important