Real Estate Owned homes continually add sludge to an economy struggling to recover. On January 5, 2012 Ben Bernanke introduced a white paper detailing his new QE to ease the problems of abandoned and foreclosed homes. The Federal Reserve Rental Program is a conversion of bank foreclosed properties to the rental markets. There have been similar smaller programs in practice across the country like the American Homeowner Preservation (offering underwater home owners the opportunity to remain in their homes as renters). Mr. Bernanke’s white paper introduces an ambitious and potentially much needed salve to the gaping wounds plaguing the housing market. REO properties are estimated to grow by 1 million homes per year in 2012 and 2013, and represent a huge drag on our economy.
The need is vast and complicated, implicating many stakeholders; some very visible and others not so much. Enthusiastic blessings from one of the most crucial of stakeholders, the investment banker, have been slow in coming. Though acknowledging the good potential of the Fed’s proposal, Goldman Sachs has voiced some reservations. The detail list of valid reasons for the skepticism is sound, but shallow. In his whitepaper submission to congress Ben Bernanke states that “the health of the housing market is a necessary part of a broader strategy for economic recovery.”
Demands for existing homes remain flat. The desire for rental properties is growing. Credit worthy buyers is at an all-time low and the outlook is still dismal. The foreclosure rate is looking to increase this year – due in part to the back log of postponed processing. The fact that many of the foreclosed properties are in poor neighborhoods is a truth. It is simply another example of how deep structural unemployment is penetrating an economy that is battling its way back to recovery. Like icebergs the true evil remains well hidden below the surface.
Goldman Sachs’ research validates a housing surplus that has a limited market of buyers. In consideration that the rental program proves a success, there are still not enough qualified buyers to make the positive difference needed to rejuvenate home ownership. Recovering revenue by way of rental properties will introduce new paradigms. The equation that introduces the opportunity cost of investing in this program can be high. In order to attract investors the purchase price of foreclosed properties must be discounted. Many feel that Government Sponsored Enterprises or GSEs like Fannie Mae, Freddie Mac, and various banks who own the properties are unwilling to offer those discounts.
There’s little guarantee that renting bank owed property will supply the needed boost to the housing market. Goldman’s estimates foretell that perhaps only half of the abandoned homes would qualify for the new program. Many potential homes for rent may still remain vacant. Essentially Bernanke’s rent program would be in danger of simply moving the problems of foreclosed homes from one segment of the economy to another, the rental market. In addition, many of the hidden difficulties within the mortgage market are still filled with unseen dynamics moving and growing within the construct.
The 1990’s heralded an era of solid revenue streams created by open trading of mortgaged backed financial instruments. The buying and trading of mortgages by mortgage bankers, like Boatmen’s Bancshares Inc., bought by NationsBank created ever increasing streams of revenue. In addition mismanaged property owners’ records accompanied sold mortgages. Lawful title holders’ records are obscured by legal machinations. Many of the homes were foreclosed on not by mortgage companies but by Home Owners Associations. According to the Community Associations Institute trade association, 24.8 million American homes are governed by HOAs. That accounts for about 62 million residents as of 2010.
Unemployed home owners owing special assessment fees to HOA’s were foreclosed on and evicted. Many HOAs placed property liens, foreclosed, evicted and purchased newly abandoned properties at a fraction of their assessed value. After these purchases the newly acquired properties are used by the HOA as rental income.
The foreclosure problem is deep, complicated and will require sophisticated tools to solve. Doom and gloom scenarios are being painted among financial fortunetellers. This writer prefers to see an economy through the eyes of a biologist. Economies are not static in nature, they behave like living organisms. They grow and change according to the demands and needs of its demographics and fiscal liabilities.
Ben Bernanke’s REO to rental program is a needed step to alleviate a little of the monetary pressure pushing the American economy down. It is the creation of new pathways to economic growth that is fundamental to economic solvency. The Rental Property Program is another aggressive QE step toward creating solutions in achieving a robust economy. Bernanke’s white paper may offer some light at the end of the tunnel. Perhaps the way Americans define its ideologies of wealth and home ownership will have to be redefined.
The Icebergs that Threaten the Fed REO to Rent Program
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