Banking

The housing market has led most of the recent economic recoveries in the United States, but today's market is so imbalanced that it's actually hampering the recovery, said Federal Reserve Governor Elizabeth Duke during a September 1 speech.

Duke, speaking at a Fed conference in Washington, DC, discussed some of the near-term steps that could help stabilize and rebalance the housing market.

Lightening homeowners' load
One way to rebalance is to reduce the number of homes entering foreclosure by easing financial strains on homeowners, which can be done by modifying past-due mortgages or helping borrowers refinance into lower-rate loans, Duke said. However, despite low mortgage rates, refinance activity has been subdued compared to previous low-rate periods.

Duke also discussed the Obama administration's Home Affordable Refinance Program (HARP), which helps homeowners with little or no equity refinance their mortgages. Roughly 8,000 borrowers have refinanced through the program, even though an estimated 4 million homeowners are eligible. Several factors may be impeding wider participation in HARP, including up-front fees added to refinancing costs and lender concerns about taking on risk from previous underwriting.

"Finding different approaches to the policies that are hindering refinancing would likely provide some support to the economic recovery while improving the circumstances of homeowners," Duke said.

Reorganizing into rentals
Converting a portion of the large volume of real estate owned (REO) properties to rental properties would also help bring balance to the housing market, she added, noting that "the weak demand in the owner-occupied housing market and the relatively high demand in the rental housing market suggest that transitioning some REO properties to rental housing might benefit both markets."

Currently, these conversions are mostly happening on a small scale because managing the rentals is expensive, and regulatory guidance and servicing practices have traditionally encouraged the active marketing of these properties as opposed to renting.

Banking supervisors, for their part, can help smooth the process of converting REO properties to rentals by clarifying existing supervisory guidance to recognize that such conversions may be a sensible option for financial institutions, Duke said.

September 23, 2011