Fed white paper calls for REO rental programs

The Federal Reserve called on lawmakers to do more to help the ailing housing market, which has been blamed for dragging down economic recovery.

In a 26-page white paper, the Fed told lawmakers that more aggressive action is needed in preventing home values from falling further and handling the large supply of foreclosures that continue to plague many markets.

One program the white paper suggested was a government program to start renting out single-family homes in foreclosure, even allowing the former owners who were foreclosed upon to rent the properties back.
An REO rental program by the government-sponsored enterprises (Fannie Mae and Freddie Mac) may cost mortgage servicers and bond investors, but the benefit of such a program in the long run needs to be weighed, the Fed said.

“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,” according to white paper.

Moreover, renting out some of Fannie Mae’s REO inventory, for example, might “deliver a better loss recovery than selling the property,” the white paper states.

The Fed also warns in the white paper to lawmakers that the “extraordinarily tight” mortgage lending standards is also harming the real estate market and keeping many from home ownership.

Without more action by the government to help housing, the Fed warns that “the adjustment process will take longer and incur more deadweight losses, pushing house prices lower and thereby prolonging the downward pressure on the wealth of current home owners and the resultant drag on the economy at large.”