What should the federal government do to address the inventory of foreclosed properties?
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Despite recent RealtyTrac data that shows a slowdown in foreclosures in 2011 compared to the past three years, elevated levels persist. In fact, the recent slowdown is the likely result of processing and legal delays more than a reflection of an improved economy.
An oversupply of housing will persist for several more years no matter what policies are enacted by the Federal government. But there are some things that can be done to better target the marketing of existing foreclosed supply.
The recent ‘White Paper’ from the Federal Reserve’s Board of Governors (January 4, 2012) gives a clear analysis yet of short and long-term interventions. The report looks at the issue from three perspectives: the oversupply of sales units, the contraction of mortgage credit, and the inefficiency of the foreclosure process.
The most significant suggestion in the paper involves the suggestion that Federal housing agencies – Fannie, Freddie, and FHA – who currently hold half of all REO (foreclosed properties owned by agencies, banks, and others) properties on the market, more aggressively rent the properties directly or structure sales or joint ventures with investors that place them onto the rental market. The Fed paper suggests potential the program design elements of an REO rental strategy.
A forward thinking White House and Congressional response ought to follow.
The emphasis on conversion from single-family homes to rental units follows the logic of current market demand; homeownership is in decline from its historic pre-recession level and rental demand (as demonstrated by industry pricing and vacancy data) remains the bright spot of residential real estate.
To augment the Fed suggestion, existing rental rehabilitation programs from the Federal government – largely tax credit driven – ought to be increased and modified to bolster rental conversion of the existing supply of REOs rather than building new units.
Some analysts (such as economist Dean Baker at the Center for Economic and Policy Research) have called for a pre-foreclosure rental conversion program for households that are seriously delinquent, to keep people in homes and thereby reduce the number of additional vacancies. This is an idea that is getting some legislative attention, although program issues such as rental pricing, time-horizon, and management standards would have to be better developed.
There is also a role for Federal regulatory agencies – the Fed, OCC, and FDIC – to make it easier for private holders of REOs to convert to longer term rental status, by issuing additional guidance on the status of the asset and how it will affect the bank’s regulatory standing.
Rental conversions by holders of mortgages or through sale to investors are not easy with housing stock that was built to for single-family sales occupancy. But a data driven approach to sales and conversions based on an understanding of market conditions, a density of properties for management economy of scale, and partnerships with local real estate actors is possible and desirable. The information and institutional infrastructure is far from perfect but it exists. It is time to act.
A longer-term Federal impact will come from re-setting the rules of the housing securitization market.
Jeremy Nowak is President and CEO of the William Penn Foundation.
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