–If GSEs Can Successfully Convert REO to Rentals, Others May Follow
By Denny Gulino
WASHINGTON (MNI) – Moving beyond monetary policy and bank
regulation, the Federal Reserve Wednesday offered its analysis of why
the housing market is stalled, holding back recovery, and disclosed it
is considering encouraging financial institutions to turn their shadow
inventory of vacant houses into rental properties.
Saying the Fed is often asked about housing, Fed Chair Ben Bernanke
sent Congress an unsolicited White Paper on the subject, stressing “the
health of the housing market is a necessary part of a broader strategy
for economic recovery.”
The White Paper identified three broad areas that need
congressional attention, the “persistent excess supply of vacant homes,”
the “potentially long-term downshift in the supply of mortgage credit”
and “the costs that an often unwieldy and inefficient foreclose process
imposes on homeowners, lenders and communities.”
The Fed said Fannie Mae and Freddie Mac, the two linchpins of
housing finance that are entirely controlled by government, are
sometimes working against the housing recovery through policies intended
to minimize their losses.
The White Paper surveys several problem areas but focuses on one
possible solution it can influence, getting financial institutions that
hold thousands of vacant house to turn them into rental properties, a
process for which there is currently no government or private program.
“While the total stock of REO properties is difficult to measure
precisely, perhaps one-fourth of the 2 million vacant homes for sale in
the second quarter of 2011 were REO properties,” the study said,
referring to Real Estate Owned by institutions.
“The combination of weak demand and elevated supply has put
substantial downward pressure on house prices, and the continued flow of
new REO properties — perhaps as high as 1 million properties per year
in 2012 and 2013 — will continue to weigh on house prices for some
time.”
So given the fact rents have turned up in the past year, that
suggests “it might be appropriate in some cases to redeploy foreclosed
homes as rental properties,” the document said.
The need for more rental housing will be long-term, the study said,
because tight credit conditions are “unlikely to unwind significantly in
the immediate future.”
Fed staff have calculated that “many REO properties appear to be
viable rental properties in terms of both physical adequacy and
potential attractiveness to tenants,” the paper said.
A full two-fifths of the REO inventory held by Fannie Mae could
“deliver a better loss recovery than selling the property,” the White
Paper said. The rate of return on REO held by the FHA is even higher.
Though managing rental property may entail more risk than outright
sales would cut down the attractiveness of a rental conversion, there is
a huge pipeline of foreclosures that is delivering more REO all the
time, and despite efforts to sell properties at a discount, the REO
inventory held by Fannie Mae, Freddie Mac and the FHA seem due to become
larger.
In one of its few conclusions, the White Paper declares that a
government program to convert vacant houses owned by financial
institutions to rentals “has the potential to help the housing market
and improve the loss recoveries on REO portfolios.”
Predicting success is difficult, the Fed said, but “an interagency
group in which the Federal Reserve is participating is considering
issues related to the design of a program” of REO-to-rentals.
“In light of the current unusually difficult circumstances in many
housing markets across the nation, the Federal Reserve is contemplating
issuing guidance to banking organizations and examiners to clarify
supervisory expectations regarding rental of residential REO
properties,” the White Paper disclosed.
“If finalized and adopted, such guidance would explain how rental
of a residential REO property within applicable holding-period time
limits could meet the supervisory expectation for ongoing good faith
efforts to sell that property,” the Fed said.
“If a successful model is developed for the GSEs to transition REO
properties to the rental market, banks may wish to participate in such a
program or adopt some of its features,” the Fed study said.
The White Paper also suggested that Fannie Mae and Freddie Mac, in
pursuing a government mandate to minimize losses and consequent draws on
the Treasury, might be ignoring policies “that might promote a faster
recovery in the housing market.”
“Some actions that cause greater losses to be sustained by the GSEs
in the near term might be in the interest of taxpayers to pursue if
those actions result in a quicker and more vigorous economy recovery,”
the Fed said.
** Market News International Washington Bureau: 202=-371-2121 **
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