The Federal Reserve and theregulators of the three housing government-sponsored enterprises (GSEs) recently took a number of important steps to shore up the U.S. housing finance system. These steps were necessary to buoy mortgage-backed securities markets and to encourage the GSEs to channel more funds into housing finance. But this support to housing finance is not sufficient to remedy the core problem weighing on the housing market and the U.S. economy. That will require bold action by Congress and the administration.

The Fed has pulled out the stops to ­support economic growth and to improve the functioning of credit markets, aggressively dropping short-term interest rates and taking extraordinary steps to bolster liquidity in securities markets. Recent ­liquidity measures were aimed largely at locked-up markets for mortgage-backed securities (MBSs), including those guaranteed by Fannie Mae or Freddie Mac as well as fully private versions. The measures ­included innovative ways to free-up portfolios of MBSs held by banks and large Wall Street broker-dealers. The effects include some narrowing of spreads between home ­mortgage rates and yields on comparable-­maturity Treasury securities.

Recent steps by the GSE regulators ­include cuts in surplus capital requirements for Fannie Mae and Freddie Mac, coupled with agreements by these secondary market GSEs to raise new capital and to channel support to key components of the primary mortgage market. The third housing GSE, the Federal Home Loan Bank System, has been authorized to purchase and hold larger amounts of MBSs guaranteed by Fannie Mae and Freddie Mac.

The core problem in housing markets is a large and persistent imbalance between supply and demand, a situation exacerbated by a serious upswing in mortgage foreclosures that’s dumping more supply onto glutted markets. The result is an accelerating downslide in national average house prices, which is taking a heavy toll on the quality of outstanding mortgages. This is wreaking havoc in mortgage securities markets and provoking a dramatic tightening of mortgage lending standards in primary markets.

Although falling house prices support standard measures of housing affordability, the speed of descent obviously has put many prospective home buyers in a wait-and-see posture. Meanwhile, falling prices not only make refinancing out of ARMs more and more difficult, but also make growing numbers of homeowners with increasingly negative equity positions unwilling to meet their monthly payments—compounding the foreclosure problem and adding downward pressure to house prices.

It’s increasingly obvious that neither the Fed nor the GSE regulators have the power to solve the core housing problem in the U.S. Therefore, Congress and the administration need to take prompt action to spur home buying, halt the upswing in foreclosures, and stabilize house prices.

A temporary program of tax credits for home buyers definitely would spur buyer demand. Write-downs of mortgage principal for underwater loans, combined with FHA financing of replacement mortgages and some type of recapture arrangement, could be quite effective on the foreclosure front. This measure would complement ­existing efforts to deal with payment shock on subprime ARMs.