* US policymakers are contemplating more direct forms of intervention in the mortgage market as home prices continue to fall. The debate is bound to intensify when Congress returns to work on April 1 (no joke), with some action looking likely either in 2008 or under a new administration in 2009. Policymakers are apt to approach this problem from three angles.
* The first and most likely approach is to facilitate or possibly force loan modification, in an effort to strengthen existing initiatives such as the Hope Now proposal announced in December. Most politicians agree on this goal but differ on how to achieve it, especially the proper balance between the role of government and the private sector.
* As falling home prices push more homeowners into negative equity positions, using the government's balance sheet to stabilize the mortgage market is getting increasing attention. The Fed's latest moves, coupled with loosening of capital requirements for government sponsored enterprises (GSEs), are steps in this direction. Key congressional Democrats have also proposed more direct risk-bearing by the Federal Housing Administration (FHA).
* As losses on mortgage-related assets mount, policymakers may also
consider measures to recapitalize the banking system, not only to limit
failures but also to minimize the effects of deleveraging on credit
availability. Options include requiring or incentivizing institutions to
raise capital as well as reducing capital requirements and providing
flexibility on fair-value accounting, although officials may limit
themselves to moral suasion for now.
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