The Federal Reserve won’t stand in the way if banks it supervises want to rent out homes they’ve repossessed, as long as it’s part of "an orderly disposition strategy" to get foreclosed properties off their books "at the earliest practicable date."
Given "the extraordinary market conditions that currently prevail," the Fed said it will not require that lenders demonstrate "continuous active marketing" of real estate owned (REO) properties if they decide that it makes more sense to rent them out than sell them at a loss.
"With mortgage delinquency rates remaining stubbornly high, the continued inflow of new real estate owned properties to the market — expected to be millions more over the coming years — will continue to weigh on house prices for some time," the Fed said in outlining the policies and procedures it expects banks to follow when renting out REOs.
The Federal Reserve, which regulates state member banks, bank holding companies, savings-and-loan holding companies, and their subsidiaries, allows lenders to hold REO properties for up to five years, with an additional five-year extension under some circumstances. National banks are subject to similar restrictions.
Bank of America recently announced a pilot program in which it will invite about 1,000 underwater and delinquent borrowers who owe more on their homes than their homes are worth the option to give up title to their house in exchange for forgiveness of their outstanding mortgage debt and the right to lease their home for up to three years.
Some consumer groups are skeptical of Bank of America’s "mortgage to lease" plan, and last week the National Association of Realtors asked the Fed and five other federal agencies to use "extra caution when evaluating the benefits of these types of programs."
In a March 28 letter to Federal Reserve Chairman Ben Bernanke, Housing Secretary Shaun Donovan, and the heads of the Treasury Department, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Federal Housing Finance Agency, NAR said Realtors "understand the importance of reducing blight by keeping homes from becoming vacant."
But the government’s efforts should "remain focused on keeping families in their homes as homeowners, rather than on programs that consolidate hundreds or thousands of properties into rentals and require large financial institutions to act as landlords," NAR said.
NAR also continues to express its reservations about another "REO to rental" plan, in which Fannie Mae and Freddie Mac are selling homes in bulk to investors on condition that they convert them to rentals.
Fannie and Freddie’s regulator, the Federal Housing Finance Agency, recently announced the first bulk sale of REO-to-rental properties to investors under a pilot program targeting hard-hit metro areas.
The first sale of 2,490 properties will be limited to eight markets: Atlanta (572 properties); Los Angeles-Riverside, Calif. (484 properties); Phoenix (341 properties); Las Vegas (219 properties); Chicago (99 properties); Southeast Florida (418 properties); Central and Northeast Florida (190 properties); and Western Florida (167 properties).
NAR says it has "no concerns" about such programs, as long as they are "implemented on a strictly limited, as-needed basis."
Investors are already converting 800,000 homes a year into rentals, NAR said, citing a recent estimate by Barclays Capital. That calls into question the need for a large-scale REO-to-rental program to protect housing markets from the impacts of foreclosures.
"The reported enthusiasm of hedge funds and Wall Street investment banks (for converting properties to rentals) should raise a red flag that they are expecting too generous returns at the cost to the banking industry and the taxpayer," NAR said. "This could occur if they buy (REOs) at a steep discount or if they allow the properties to deteriorate while mistreating tenants."
FHFA has said it will approve bulk sales only in markets where there’s a glut of properties on the market, and has opened up bidding to smaller investors, including individuals.
The government’s prequalification parameters "offer real opportunities for smaller players," Inman News columnist Ken Harney reported when they were announced.
Individuals with net income above $200,000 for each of the past two years and married couples with income of $300,000 or more can prequalify to place bids.
"Strong preference" will be given to bidders who have created working relationships with local nonprofits, government agencies and community-based organizations, and only those actively involved in real estate or mortgages can prequalify.
Federal officials told Harney only about half of Fannie’s roughly 120,000 REO inventory — 60,000 homes — are being considered for bulk transactions. About 30,000 homes in Freddie’s REO inventory could be sold in bulk.
According to the most recent report from data analytics firm CoreLogic, 862,000 homes completed the foreclosure process during the 12 months ending in February, and there have been 3.4 million completed foreclosures since the start of the financial crisis in September 2008.
The pace of completed foreclosures slowed in February to an annual rate of 670,000 homes per year, CoreLogic said. There were 1.4 million homes at some stage in the foreclosure process, down 7.4 percent from the same time a year ago.
NAR argues that there are already shortages of homes for sale in some markets, including Phoenix and Los Angeles. Phoenix, which had a 17-month supply of homes for sale in 2007, now has a 3.2-month supply. Months’ inventory in Los Angeles, meanwhile, has slipped from a high of 19 months to its more recent level of about four months’ inventory, NAR said.
The Federal Reserve listed a number of hoops that lenders will have to jump through if they want to rent homes. Banks that have large inventories of REO homes are expected to have a rental strategy, and formal policies for determining whether properties meet local building codes or if improvements are required to make them habitable.
A bank’s decision to rent out foreclosed homes "might depend significantly on the condition of individual properties, local market conditions for rental and owner-occupied housing, and its capacity to engage in rental activity in a safe and sound manner and consistent with applicable laws and regulations," the Fed said.
Banks must assess the risks involved in renting properties, such as potential missed rent payments and vacancies, and legal and marketing costs.
Banks may hire third-party vendors, including real estate agents or professional property managers, to manage their REO properties, but must have policies and procedures in place to ensure vendors have "appropriate expertise in property management, be in sound financial condition, and have a good track record in managing similar properties."
Banks that rent out 50 or more properties must "systematically document" how they meet the Fed’s supervisory expectations. According to the Fed, 98 percent of community banks hold 50 or fewer one- to four-unit residential REO properties.
NAR — whose members lose out whenever REO properties are sold outside of a multiple listing system — maintains that the top priority for limiting the impact of foreclosures should be expanding credit for homebuyers and investors.
The U.S. Department of Housing and Urban Development, for example, could expand the availability of the FHA’s section 203(k) rehabilitation loan program to investors, which would help them buy distressed and REO properties.
The government could require Fannie Mae and Freddie Mac to drop the limit on the number of mortgages a borrower may hold. In 2009, Fannie Mae upped its limit from four to 10 mortgages, but Freddie Mac’s limit remains four.
"FHFA has total policy control over … Fannie Mae and Freddie Mac, and we believe it should exercise this authority in this case," NAR said.