The immediate trigger of the crisis, as you know, was a sharp decline in house prices, which reversed a previous run-up that had been fueled by irresponsible mortgage lending and securitization practices. Policymakers at the time, including myself, certainly appreciated that house prices might decline, although we disagreed about how much decline was likely; indeed, prices were already moving down when I took office in 2006. However, to a significant extent, our expectations about the possible macroeconomic effects of house price declines were shaped by the apparent analogy to the bursting of the dot-com bubble a few years earlier. That earlier bust also involved a large reduction in paper wealth but was followed by only a mild recession. In the event, of course, the bursting of the housing bubble helped trigger the most severe financial crisis since the Great Depression. It did so because, unlike the earlier decline in equity prices, it interacted with critical vulnerabilities in the financial system and in government regulation that allowed what were initially moderate aggregate losses to subprime mortgage holders to cascade through the financial system. In the private sector, key vulnerabilities included high levels of leverage, excessive dependence on unstable short-term funding, deficiencies in risk measurement and management, and the use of exotic financial instruments that redistributed risk in nontransparent ways. In the public sector, vulnerabilities included gaps in the regulatory structure that allowed some systemically important firms and markets to escape comprehensive supervision, failures of supervisors to effectively use their existing powers, and insufficient attention to threats to the stability of the system as a whole.

We're going to continue to communicate our policy intentions and to make clear that notwithstanding how the mix of policy tools changes that we intend to maintain a highly accommodative monetary policy for the foreseeable future.

And I think that message is beginning to get through. And I think that will be helpful.

More generally, we will be watching to see if the movement in mortgage rates has any material affect on housing. I mean, the main thing is to see housing continue to grow, more jobs in construction and the like.

And, as we've said, if we think that mortgage rate increases are threatening that progress, then we would have to take additional action in the monetary sphere to try to address that.

Of course, there's always scope for Congress to look at the problems that remain in the housing market in terms of people underwater, in terms of refinancing of underwater mortgages, other kinds of issues that -- that Congress could -- could look at.

But we are -- we're going to be looking at it from the perspective of whether or not the housing recovery is continuing to a degree sufficient to provide the necessary support for the overall economic recovery.

I believe that the accommodative policies of the FOMC and the concerted effort we have made to ease conditions in the mortgage markets will help the economy continue to gain traction.

[I]t is entirely possible that it might be appropriate at some point to adjust the pace of MBS purchases in response to developments in primary or secondary mortgage markets. Within the context of the Committee's judgment about the appropriate overall level of monetary accommodation, such an adjustment could result in an increase or decrease in the pace of total asset purchases, or it could lead to a change in the composition of purchases.

Continuing on with the theme of maturity transformation, the next brief stop on the tour is the agency mortgage real estate investment trust (REIT) sector. These agency REITs buy agency mortgage-backed securities (MBS), fund them largely in the short-term repo market in what is essentially a levered carry trade, and are required to pass through at least 90 percent of the net interest to their investors as dividends. As shown in exhibit 7, they have grown rapidly in the past few years, from $152 billion at year-end 2010 to $398 billion at the end of the third quarter of 2012.

One interesting aspect of this business model is that its economic viability is sensitive to conditions in both the MBS market and the repo market. If MBS yields decline, or the repo rate rises, the ability of mortgage REITs to generate current income based on the spread between the two is correspondingly reduced.

Today, though, we are focusing on a second impediment to the impact of monetary policy on the economy through housing and mortgage finance: the significant widening of the spread between yields on mortgage-backed securities in the secondary market and primary mortgage rates. Actions taken by the FOMC such as its MBS purchase program operate principally on the secondary rate. For these actions to achieve their full impact, reductions in the secondary rate need to also pass through to the primary rate. To the extent that the primary-secondary rate spread widens the reduction in pass-through limits the full impact of the policy actions.

Some recent homeowner programs have tried to eliminate barriers to refinancing and have helped. For example, I hear from bankers that the second version of the Home Affordable Refinancing Program, or HARP II, appears to be quite successful in helping homeowners who are saddled with negative equity and mortgage rates well above the current market rates.

Referring to the high standards of lenders following the housing bust, Bernanke said that “some tightening was no doubt necessary.”

“That being said, the pendulum has probably swung too far in the other direction by this time,” he said. “Conditions are still too tight for the health of both the financial system, for the construction industry and for our economy. ”

Another Fed dissenter, the Dallas Fed's Richard Fisher, opposed Tarullo's suggestion of further mortgage bond buys. "I am not similarly inclined," he told reporters.

With short-term rates already about as low as they can go, the FOMC has also taken some unconventional measures to provide additional monetary accommodation. The combined effect of these monetary policies helped stabilize financial markets in 2009, hold deflation at bay in 2010, and support a modest recovery. But, in the absence of favorable developments in the coming months, there will be a strong case for additional measures.

Some have argued that monetary policy should do no more, and that the political branches of government should adopt fiscal or other policies to encourage increased economic activity and job creation. I certainly do not disagree that well-conceived policies by other parts of the government could produce gains in employment, investment, and spending. But the absence of such policies cannot be an excuse for the Federal Reserve to ignore its own statutory mandate…even when we know that monetary policy alone cannot solve all the economy's problems.

Within the FOMC and in the broader policy community, there has been considerable discussion of possible additional accommodative measures, from communication strategies such as forward guidance on the likely path of the federal funds rate to additional balance sheet operations. I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities (MBS), something the FOMC first did in November 2008 and then in greater amounts beginning in March 2009 in order to provide more support to mortgage lending and housing markets.

It is imperative to reconsider the compensation structure so that servicers have adequate incentives to perform payment processing efficiently on performing mortgages, and to perform effective loss mitigation on delinquent loans.

I believe that as a country, we need to take this opportunity to rethink many aspects of our public policy programs in the context of housing finance. Home ownership has long been part of the American dream, in no little part because home owners have invested not just in their houses but in their communities. But, through the mortgage interest tax deduction and other programs, we are encouraging people to buy homes by taking on debt—and sometimes large amounts of debt. If we truly want to encourage home ownership, we should contemplate programs that provide incentives for individuals to save and become equity holders in their homes—and, by extension, in their communities.

[T]he problems are sufficiently widespread that they suggest structural problems in the mortgage servicing industry. The servicing industry overall has not been up to the challenge of handling the large volumes of distressed mortgages. The banking agencies have been focused for some time on the problems related to modifying mortgage loans and the large number of consumer complaints by homeowners seeking loan modifications. It has now become evident that significant parts of the servicing industry also failed to handle foreclosures properly.

Even in the case of a servicer who has every best intention of doing "the right thing," the bottom-line incentives are largely misaligned with everyone else involved in the transaction, and most certainly the homeowners themselves.

Clearly, the recent mortgage crisis has highlighted the potential ramifications of a mortgage market that is not functioning well. [Home Mortgage Disclosure Act] data do not create the market or solve all market problems, but they do help us understand what is happening in the market. The time is certainly ripe for reviewing and revising the data elements, standards, and reporting formats.