CompraoAlquila Real Estate

By: Mark Heschmeyer / CoStar Group

The Federal Reserve this past week issued aggressive and controversial recommendations for dealing with more $7 trillion in housing wealth loss since the onset of the Great Recession. Many economists agree that housing holds the key to a stronger and more widespread recovery in the U.S., and the Fed’s recommendations are intended to address the buildup of surrendered and foreclosed housing inventory that continues to dampen consumer confidence.

The Federal Reserve’s commentary this past week in a white paper, “The U.S. Housing Market: Current Conditions and Policy Considerations,” recommended policies that would limit the growth of the inventory of foreclosed homes, make mortgage credit easier to access and limit the flow of homes into foreclosure.

Fitch Ratings says the Fed’s recommendations face challenges, but may benefit the private-label residential mortgage-backed securities (RMBS) sector. The primary recommendation of the white paper is a government-facilitated REO-to-rental program, either through direct rentals or third-party sales.

“Expanding the options available for holders of foreclosed properties to dispose of their inventory responsibly could reduce the number of distressed sales and the effect of those sales on home prices,” Federal Reserve Governor Elizabeth A. Duke told the Virginia Bankers Association last week.

“For example, in many housing markets the demand for rental housing is much stronger relative to supply than in the market for owner-occupied homes. Reducing some of the barriers to converting foreclosed properties to rental units will help to redeploy the existing stock of houses in a more efficient way,” Duke said.

“Along the same lines, aggressive neighborhood stabilization efforts, including transferring low-value properties to public or nonprofit entities, such as land banks, that can manage properties that are not dealt with adequately through the private market, could lessen the effect of foreclosures on the prices of homes in the surrounding neighborhoods,” she added.

In analyzing the recommendations, Fitch Ratings reported this week that “while we believe this idea has merit, as it could potentially reduce the number of distressed properties for sale, it would face some operational challenges. A direct rental program could be an undertaking of some magnitude and cost for an REO holder due to the staffing and property management demands associated with large-scale property rental programs.”

“While a third-party sales program could minimize these direct costs, an investor’s ability to secure financing and the lower bids for bulk REO present a different set of challenges,” Fitch Ratings said. “Lastly, a program subsidy may not be politically well-received if it were to lower the recoveries otherwise achieved through sales to owner-occupants.”

Somewhat less challenging, from Fitch Ratings’ viewpoint was the recommended expansion of a program that would allow Fannie Mae and Freddie Mac to refinance underwater borrowers who are current on their mortgages.

“The potential default and loss exposure to the private-label RMBS would be significantly reduced by such a program,” Fitch Ratings said. “But this may be the most politically unpalatable of the recommendations as it would increase the credit risk exposure and size of the GSEs’ balance sheets.”

So if REO to rental is flawed and expanding refinancings is political suicide, what’s to like?

Fitch Ratings said a third recommendation calling for the increased use of foreclosure alternatives, such as short sales and deeds-in-lieu, is one that it believes may be the easiest to implement as it has already been put into practice by most servicers for some time now.

“Furthermore, we find that these alternatives have lower loss severities relative to foreclosures as they reduce the need for legal procedures and lower the cost to protect, maintain and broker the property,” Fitch reported.

“Overall we believe these recommendations could be a net positive for private-label RMBS because they would primarily reduce distressed housing inventory and some could lessen the downward pressure on prices,” Fitch concluded.

Fed Governor Duke told Virginia bankers that “policies that increase credit availability for homeowners or investors seeking to purchase a home or to refinance an existing mortgage would allow more borrowers to access lower interest rates and thus improve the transmission of monetary policy to the economy.”

“Renewed attention to a broad menu of options to modify existing mortgages would provide aid to struggling homeowners and would help to reduce the flow of foreclosed homes into distressed inventory,” she added. “When foreclosure cannot be avoided, incentives provided to homeowners that encourage short sales and deeds-in-lieu of foreclosure can reduce the time and costs of foreclosure and minimize negative effects on communities.”