An S&P/Case-Shiller index of property values in 20 cities dropped 3.4 percent in the year through October. Existing home sales remain 18 percent below their 10-year average and Dudley estimated properties seized by lenders may rise to 1.8 million this year, and the same number next year, from about 1.1 million last year and 600,000 in 2010.
Housing's share of gross domestic product, including household spending on related services like utilities and rent, declined to 15 percent in the third quarter from 18.6 percent in 2005, according to the National Association of Home Builders.
The Mortgage Bankers Association, based in Washington, estimates that home-loan originations declined last year to an 11-year low of $1.3 trillion and will fall to $968 billion this year, the least since 1997.
Protecting Taxpayers
Potential first-time buyers are particularly hurt by tightened credit, Bernanke's paper said. Lenders are avoiding making risky loans for government programs on concerns that Fannie Mae and Freddie Mac may force them to repurchase the debt if there's an underwriting error or delinquencies will prove costly for servicing departments.
Only about 85 percent of lenders are offering loans eligible for guarantees by Fannie Mae and Freddie Mac, which were seized by the government in 2008, to borrowers with 680 credit scores and 10 percent down payments, according to LoanSifter Inc. data cited by the study. Fewer than 50 percent are making loans in the companies' lowest credit tier, the Fed's Duke said last week.
Although Fannie Mae and Freddie Mac's ability "to put back loans to lenders helps protect the taxpayers from losses, an open question is whether the costs of the associated contraction in credit availability outweigh the benefits" of lower losses, she said.
Most troubling is that creditworthy borrowers are being locked out for minor blemishes or documentation challenges as lenders look to protect themselves, said Willie Newman, head of residential mortgage originations at Cole Taylor Bank in Chicago.
"There are people where everything about them looks good except this one little thing," he said. "But you do precisely what they tell you to do, you don't deviate, because the price of getting it wrong is too large."
Refinancing has also slowed because lower prices have left about a quarter of homeowners with mortgages owing more than their properties' values. Almost half of the more than $3.7 trillion of 30-year fixed-rate home loans in government-backed bonds have rates of about 5.5 percent or more, according to data compiled by Bloomberg.