Fed urges REO to rental among other steps on housing  by Ethan Handelman and Sarah Jawaid, National Housing Conference
The Federal Reserve submitted a 26-page letter to Congress on January 4 recommending action on real estate owned, or REO, properties nationwide owned by Fannie Mae, Freddie Mac, FHA, and various lenders comprising around “one-fourth of the 2 million vacant homes for sale in the second quarter of 2011.” This paper is a notable move for the Fed in several ways, because it:

  • Points to weak housing markets as an impediment to economic recovery
  • Highlights the need for greater housing affordability and stability of tenure amidst unemployment and foreclosures
  • Signals possible action by the Fed to clarify banks regulatory obligations if renting REO property
  • Identifies conversion of REO homes to rental use as a needed step, which requires action by others—Congress, FHFA, the GSEs, FHA, and private lenders
  • Provides useful discussion of other steps to revive housing markets, including principal reductions, broader refinancing efforts, targeted interventions and rental options for underwater homeowners, and improvements to mortgage servicing.

Federal Reserve Chairman Ben Bernanke wrote REO conversion can help “redeploy the existing stock of houses in a more efficient way.” It would address rising demand for rental units, low demand for owner-occupied properties, and banks hesitance to provide borrowers access to credit. The paper also highlights the inefficiencies and disruptive consequences of foreclosures in the form of economic harm of vacant properties to a community “beyond the personal suffering and dislocation” of a family. Renting these properties could help move the housing market to a more stable footing.

The Fed’s attention to REO properties builds on efforts already in motion by FHFA and HUD, which requested information in August of last year on ways to best handle the REO portfolio of Fannie Mae, Freddie Mac, and FHA. The agencies were inundated with over 4,000 responses from various housing industry leaders and are currently sifting through the proposals, including one from NHC’s Foreclosure Response and Neighborhood Stabilization Task Force.

The Fed’s paper observes some of the key investment challenges for REO conversion, but necessarily goes into little detail on the basic real estate difficulties of operating a portfolio of single-family rentals, including maintenance, oversight, geographic dispersion, and tenant responsibilities. It acknowledges a potential role for nonprofits as experienced rental managers, but does not directly address the need to provide seller financing or other support to allow nonprofits and other mission entities to bid competitively with purely economic investors.