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Thursday, January 26, 2012

Fed's Housing Fix?

Does Fed's Housing Fix Means Everyone Loses?

The Federal Reserve Chairman Ben Bernanke on Wednesday proposed policies that would force a recovery in housing, but cautioned that there was no single solution to the housing market's problems and that everyone from investors to taxpayers would need to feel the pain.
In a 26-page white paper, the Fed outlined ways to ease some of the pressures afflicting the housing market.

While some of the weakness was due to weak labor market conditions and poor demand, policies that would address the excess inventory of foreclosed homes, borrower access to mortgage credit and inefficient foreclosure procedures should be considered, the central bank said.

The large inventory of foreclosed or surrendered properties is contributing to excess supply in the for-sale market, placing downward pressure on house prices and exacerbating the loss in aggregate housing wealth. At the same time, rental markets are strengthening in some areas of the country, reflecting in part a decline in the homeownership rate," the paper noted.  
"Reducing some of the barriers to converting foreclosed properties to rental units will help redeploy the existing stock of houses in a more efficient way. Such conversions might also increase lenders' eventual recoveries on foreclosed and surrendered properties."

The regulator is considering issuing guidance to banking organizations and examiners to clarify supervisory expectations regarding rental of residential REO properties by such organizations while such circumstances continue (and within relevant federal and statutory and regulatory limits).

As of September 2011, U.S. commercial banks had $10 billion in residential REO properties on their balance sheets, while savings and loans had an additional $1.4 billion. But serviced-for-others REO portfolios managed by banking organizations are significantly larger than their owned portfolios.

The Fed also suggested that banks actively consider alternatives to foreclosures such as deeds-in-lieu of foreclosure or more and EASIER short sales, which can help reduce transaction costs and minimize negative effects on communities.  

The central bank warned that failure to take action would mean the adjustment process in the housing market will take longer adding to "deadweight" losses, pushing house prices lower and prolonging the downward pressure on the wealth of current homeowners and the resultant drag on the economy at large.

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