The government should consider helping the nation’s vacant, unsold stock of foreclosed properties by supporting initiatives to occupy.
Federal Reserve Chairman Ben Bernanke believes that one aspect should be a government support program that allows renters to move into those houses.
In a letter Wednesday to ranking members on the House Committee of Financial Services, Reps. Spencer Bachus, R-Ala., and Barney Frank, D-Mass., Bernanke said that inefficiencies in the foreclosure and mortgage origination processes are dragging on the economic recovery.
However, solutions are available, he added.
“Preliminary estimates suggest that about two-fifths of Fannie Mae’s REO inventory would have a cap rate above 8% — sufficiently high to indicate renting the property might deliver a better loss recovery than selling the property,” Bernanke’s staff writes in a supporting white paper.
“Estimated cap rates on the Federal Housing Administration‘s REO inventory are a bit higher — about half of the current inventory has a cap rate above 8% — because FHA properties tend to have somewhat lower values relative to area rents,” they said.
According to the white paper, Atlanta holds the largest amount of government-sponsored enterprises REO (5,000). Second place tieholders: Chicago, Detroit, Phoenix, L.A., are all below 3,000, by way of comparison.
In a scenario of declining house prices such as this, homeownership should be promoted, according to the white paper. Indeed, they argue that in many cases REO-to-rentals may be inappropriate. Yet unless mortgage origination requirements, with tighter underwriting standards, are loosened in the immediate future, borrowers may have little choice but to rent.
Furthermore, support for such a program will cost mortgage servicers, bond investors and even taxpayers. But it may be a sacrifice for the greater good.
“Some actions that cause greater losses to be sustained by the GSE in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery,” the white paper states.
Write to Jacob Gaffney.
Follow him on Twitter @jacobgaffney.
