By Yali N’Diaye

WASHINGTON (MNI) – The U.S. housing market remains “severely” out
of balance, hampering economic recovery, and while a longer-term policy
needs to be defined, balancing supply and demand is an “immediate
priority,” Elizabeth Duke, member of the Board of Governors of the
Federal Reserve, said Thursday.

With at least one million properties likely to pass through real
estate owned inventory this year and an additional million in both 2012
and 2013, “REO properties are weighing heavily on the market for
owner-occupied house,” Duke noted in prepared remarks to the Federal
Reserve Board Policy Forum dedicated to ‘The Housing Market Going
Forward: Lessons Learned from the Recent Crisis.’

So addressing the REO inventory might be a good way to help
rebalance the housing market, she said.

This is a focus of the administration, which on August 10 issued a
request for information “to solicit ideas for sales, joint ventures, or
other strategies to augment and enhance Real Estate-Owned (REO) asset
disposition programs of Fannie Mae and Freddie Mac (the Enterprises) and
the Federal Housing Administration (FHA).”

When issuing the request, the Federal Housing Finance Agency
(FHFA), the U.S. Department of the Treasury and the U.S. Department of
Housing and Urban Development said they were “exploring alternatives
that will facilitate the current and future disposition of REO, improve
loss recoveries compared to individual retail REO sales, help stabilize
neighborhoods and local home values, and where feasible and appropriate,
improve the supply of rental housing.”

While Duke stressed “supervisors encourage sales as the primary
disposition tool,” she added that “conditions are unusual enough that
it might also make economic sense to clarify existing expectations to
recognize that in some cases converting a portion of residential REO to
rental may be a reasonable option for financial institutions.”

“Such conversions might also be in the best interests of
lienholders and guarantors if recoveries from renting out properties
exceed those from outright sales,” she argued. “Over time, as financing
conditions ease and the number of REO properties to be sold declines,
the share of properties sold to owner-occupants and sold to investors
for rental will adjust commensurately.”

Conversions could also benefit the owner-occupied housing market,
which faced weak demand, as high unemployment and tight credit
conditions make access to credit difficult.

Even the rental market — where demand is high and where
“conditions supporting rental demand” are likely to “persist for some
time” — could benefit from this option.

Clearly, “We need to deal with the unprecedented number of loans in
or still entering the foreclosure pipeline, the disposition of
properties acquired through foreclosure, and the effect of a high
percentage of distressed sales on home prices,” Duke urged.

“Regardless of how we got here, we, as a nation, currently have a
housing market that is so severely out of balance that it is hampering
our economic recovery,” she added.

She stressed the combination of high inventories of home for sales
and the high proportion of distressed sales suggest additional downward
pressure on house prices.

So converting the outstanding REO to rental would be a good option,
provided rental programs are cost effective.

Longer term, the housing reform also needs to be addressed, Duke
said, adding the role of the government must be defined in addition to a
greater private sector involvement.

But for now, “An immediate priority is balancing supply and demand
in a market overwhelmed by financially stressed homeowners, tight credit
conditions, and an unusually high number of foreclosed homes.”

** Market News International Washington Bureau (202) 371-2121 **

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