WASHINGTON - Federal Reserve Gov. Elizabeth Duke said Tuesday there are signs the housing market is on the mend, but uncertainty about the economy and regulations is inhibiting lending, and without more clarity this could hamper recovery in housing and the overall economy.

Duke urged officials to make final decisions on regulatory changes, including those involving government-sponsored housing enterprises, and also argued for moving more foreclosed homes into the rental market to balance supply and demand.

In her speech prepared for delivery to the National Association of Realtors Midyear Legislative Meetings and Trade Expo, Duke noted that while still under stress, housing statistics are "down from their post-crisis peaks, and there are signs that further gradual improvement may lie ahead."

"The share of loans entering delinquency for the first time has been trending lower for more than two years. This decline in early-stage delinquencies has coincided with sustained reductions in broader measures of delinquency -- most notably, total loans past due," Duke said.

And there are positive signs in the home price trend, which is falling more slowly than previously, with some city markets even reporting price increases, she said.

In addition, the inventory of existing homes for sale is approaching six months, which along with leveling of prices is "suggesting that some equilibrium is being achieved, albeit at low levels," Duke said.

But as fears about the economy, especially given the high unemployment rate, remain, tighter mortgage standards are making it harder for potential buyers to secure loans, particularly for first-time homebuyers, she noted.

"Given the role that poor lending decisions played in the financial crisis, it is appropriate that lenders have tightened their lending standards," Duke said, but she cautioned that "if lenders tighten more than is warranted, it will hamper the recovery of the housing market and, in doing so, restrain economic growth."

While the economy is the primary concern of mortgage lenders -- which likely has led them to hold off on hiring, creating an infrastructure constraint that also is slowing lending -- Dodd-Frank regulation and the fate and future structure of Fannie Mae and Freddie Mac also creates uncertainty that makes lenders reluctant to extend mortgages, she said.

"Collectively, these uncertainties about the future are likely contributing significantly to the tight lending standards in the mortgage market today," Duke said.

Still, she was somewhat upbeat about measures underway to stabilize the market.

"I think efforts under way to reduce the flow of foreclosed homes and distressed sales in the market will help to stabilize home prices. Mortgage loan modifications, short sales, and deeds-in-lieu of foreclosure all act to reduce the number of homes in the foreclosure pipeline," Duke said.

But further steps, like moving more homes into the rental market, also should be pursued.

"Recent price signals -- higher rental rates and falling rental vacancies combined with low home prices and elevated single-family home vacancies -- indicate that by reallocating some of the foreclosed home inventory to rental property, investors could help balance supply and demand in both the rental and the owner-occupied markets."

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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