The Federal Reserve is considering “guidance” to lenders that would allow the conversion of foreclosed homes into rentals, without impeding efforts to sell the bank-owned properties.
The Fed’s suggestion comes in a white paper on the much-troubled U.S. housing market that Fed Chairman Ben Bernanke provided to the chairmen and ranking members of the House and Senate banking committees.
Another suggestion from the Fed is to involve the mortgage financing firms, Fannie Mae and Freddie Mac, in the expansion of a program that helps borrowers in negative equity refinance their loans. But such a move would require lawmakers to expand the authority of Fannie and Freddie, which have already received $170 billion in bailouts and are quite unpopular among lawmakers in both parties.
Part of the Fed paper’s focus is on the plight of communities grappling with abandoned properties, and the lingering foreclosure process for lenders facing mounting inventories and displaced families seeking affordable housing.
At the same time, rental markets are strengthening in some areas, the Fed pointed out.
“Reducing some of the barriers to converting foreclosed properties to rental units will help redeploy the existing stock of houses in a more efficient way,” the Fed said. “Such conversions might also increase lenders’ eventual recoveries on foreclosed and surrendered properties.”
The foreclosure crisis has helped push home prices down about 33 percent from their 2006 peak, resulting in about $7 trillion in household wealth losses and “an associated ratcheting down of aggregate consumption,” the Fed’s said.
The Fed focuses on three key issues that need more aggressive attention. The three areas:
- A persistent excess supply of vacant homes on the market, many of which stem from foreclosures;
- A marked and potentially long-term downshift in the supply of mortgage credit;
- The costs that an often unwieldy and inefficient foreclosure process imposes on homeowners, lenders and communities.
The Fed said it is contemplating new “guidance” to banking organizations and examiners on the rental of residential bank-owned (REO) properties, taking into account existing regulatory limits. Such guidance could allow the renting out of the property while meeting all requirements for selling the property.
“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.
Moreover, if Fannie Mae and Freddie Mac, holders of more than half of U.S. mortgages, can develop a “successful model” for the transition of REO properties to the rental market, “banks may wish to participate in such a program or adopt some of its features.”
The Fed also said there are obstacles limiting access to mortgage credit even for creditworthy borrowers, creating a weakness in housing demand and barriers to refinancing.
“Further attention to easing some of these obstacles could contribute to the gradual recovery in housing markets and thus help speed the overall economic recovery,” the Fed said.
But banking regulators ply a delicate balance between expanding access to credit and promoting proper lending standards to keep the banking sector on a recovery pace.
The Fed said regulators have been consulting with Fannie and Freddie and loan originators on the tightness in lending standards.
“Continued efforts are needed to find an appropriate balance between prudent lending and appropriate consumer protection, on the one hand, and not unduly restricting mortgage credit, on the other hand,” the Fed said. “In particular, policymakers should
recognize that steps that promote healthier housing and mortgage markets are good for safety and soundness as well.”
The Fed also suggested expanding the government’s Home Affordable Refinance Program (HARP) that allows qualifying borrowers who are current on their payments, and whose mortgages are owned or guaranteed by Fannie Mae or Freddie Mac, to refinance even if they have insufficient equity
The Fed proposed expand Fannie and Freddie refinancing to allow borrowers with high LTVs (loans to value) who are not able to refinance through any public or private program.
However, such an expansion would require new legislation, since Fannie and Freddie
“are prohibited from purchasing or guaranteeing mortgages with LTV ratios exceeding 80 percent, unless the mortgages have credit enhancement such as mortgage insurance,” the Fed conceded.