Bernanke: Fed Should Help Turn Foreclosures Into Rentals


reo propertyMost of Washington's initiatives to staunch the flow of foreclosures glutting the housing market have been woefully inadequate. (We're looking at you, HAMP, HAFA and HARP). But a new idea put forth by Federal Reserve Chairman Ben Bernanke might actually make a dent in the bank-owned backlog: Allow renters to move into foreclosures.

HousingWire reports that the chairman endorsed the idea in a letter sent Wednesday to ranking members of the House Committee of Financial Services.

If prolonged foreclosures and dicey mortgage origination is holding back the recovery, he wrote, then filling up the nation's vacant (and otherwise deteriorating) homes with renters might be the best way to cut losses and protect investments.

In a preliminary study of Fannie Mae's REO inventory -- foreclosures in which the lender owns the property because they couldn't unload it -- two-fifths of the homes showed more potential as rentals than as resales. For foreclosures purchased with Federal Housing Administration (FHA) loans, the rent potential is even higher, since homes secured through FHA loans (a favorite of first-time buyers) tend to sell for less.

Part of the problem, as owners in some of the hardest-hit states will attest, is that vacant homes invite all sorts of calamities for prospective buyers. In humid climes like Florida, mold can ravage even the best built homes, and vandals and squatters can cause damage that far exceeds the value of some foreclosed properties.

Keeping foreclosed homes occupied could also have the added benefit of protecting neighborhood property value, which is a major concern for sellers and the countless others not yet willing to attempt a sale. The National Association of Realtors estimates that foreclosures typically sell at a 20 to 25 percent discount, which drags neighboring properties value down. Zillow estimates that homes lost $700 billion in value in 2011 alone.

With fears running high that the FHA might need a bailout in 2012 if the market doesn't improve, renting foreclosures might be a welcome cost-saving measure to preserve the administration's coffers.

Of course, it also couldn't hurt if those homeowners evicted through foreclosure are allowed to stay in their homes through the rental program.

Also see:
Foreclosures Could Be on the Rise Again, Report Says

Study: Foreclosure Process Time Has Doubled Since 2007


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