The Board of Governors of the Federal Reserve System recently released a white paper on housing issues, including their thoughts on  management of vacant homes in foreclosure. While their ideas, if implemented, have potential to return some properties to productive use, it should be clear that ensuring that vacant properties don’t negatively impact their communities should be a top consideration for servicers, government-sponsored enterprises (GSEs), private investors, and others with responsibility for these homes.

 

The Federal Reserve laid out reasoning to support a broad-scale REO-to-rental program in a white paper outlining priorities for the nation’s housing policy. Real-estate-owned or REO is the term for post-foreclosure properties that are not sold at auction. The Federal Housing Finance Agency (FHFA) , which manages the GSEs under conservatorship, previously released a request for information in August 2011 for input on how to design a rental program for its extensive REO portfolio, which comprises about half of the nation’s REO inventory, but has not yet implemented a program.

 

While there are advantages to renting REO homes, such as the rising demand for rental housing as more people are unable to access homeownership, there are many challenges to setting up a program at a large scale. For one, investors may find it difficult to secure financing for a large purchase of scattered-site, single family homes and acquire enough homes to achieve the economies of scale necessary to managing a rental program. Bank regulatory guidelines also typically encourage banks to sell REOs as quickly as possible, instead of holding on to them and managing them as landlords. Banks often need special permission from their regulator to hold REOs for more than five years. To address these problems, the Fed encourages targeting a program in areas with sufficient concentration of GSE homes to achieve scale.  Chicago has the second-largest inventory of GSE-owned REOs in the country, making it a good possibility for an REO-to-rental program.

 

The FHFA has been reluctant to engage in programs that could stabilize the housing market, such as principal writedown loan modifications, stating that its role is to minimize losses to taxpayers. The Fed white paper, in contrast, notes that “some actions that cause greater losses to be sustained by the GSEs 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.” Similarly, the GSEs should not cut corners when it comes to the community impacts of an REO-to-rental program for the sake of minimizing short-term losses. Any REO-to-rental program should prioritize responsible management of the rental properties, whether the investor is a GSE or a third party, and seek public comment to ensure that managers are following guidelines. One way to promote responsible stewardship that was suggested by the Fed is to tie the compensation of third-party investors and managers to adhering to certain best practices. In addition to the Fed’s recommendation, the GSEs should also regularly consult with localities and design programs in such a way that resources will be targeted to support local strategic priorities, which would amplify the stabilizing impact of an REO-to-rental program.