UberRealty

Housing Market: Current Conditions and Policy Considerations acknowledges that much of the weakness in the housing market is related to poor labor market conditions and will take time to be resolved but outlines three dimensions along which policymakers could take action to ease some of the pressures on the housing market:
…The large inventory of foreclosed or surrendered properties (REO), perhaps representing one-quarter of the 2 million vacant homes for sale in the second quarter of 2011, is putting downward pressure on house prices,and exacerbating the loss in household wealth.

…The price signals in the markets, that is the decline in house prices and the rise in rents, suggest that it might be appropriate in some cases to convert foreclosed homes into rental properties and, at this time, with no indication that the downturn in homeownership being likely to reverse in the immediate future, there are indications of a longer-term need for expanded rental housing stock.
…Second, attracting investors to bulk sales has typically required REO holders to offer significantly higher discounts relative to those given owner occupants, in part because it can be difficult to investors to obtain financing for such sales, and third, the supervisory policy of GSE and banking regulators has generally encouraged sales of REO properties as early as practicable.
…Despite the mandate of the Federal Housing Finance Agency (FHFA) as conservator of the GSEs to minimize taxpayer losses, some actions that cause greater losses to the GSEs in the near term might be advantageous if they lead to a quicker and more vigorous recovery.

…An REO to rental program that relies on sales to third-party investors will be more viable if the cost-pricing differential can be narrowed which might be done by (a) structuring sales as competitive auctions; (b) making sales packages more attractive to a variety of investors, or (c) providing investors with the debt financing.

…The paper also suggests some innovations for reducing the amount of time that a vacant property remains in inventory such as auctioning the rights to acquire a future stream of properties that might be foreclosed in a given neighborhood rather than auctioning existing REO holdings or to encourage deed-for-lease programs which circumvent the REO process entirely by exchanging a deed-in-lieu for a rent-back arrangement.
…The paper touches only lightly on this topic, saying that the regulators have been in consultation with the GSEs and originators about the sources of the apparent tightness in lending standards and that balance is needed between prudent lending and appropriate consumer protection on one hand and not unduly restricting credit on the other.
…Beyond the personal suffering, foreclosures can be a costly and inefficient way to resolve mortgage payment obligations because they can result in “deadweight losses”, i.e. costs that do not benefit anyone such as neglect and deterioration of properties and neighborhoods and the impact of that in putting additional downward pressure on prices.

…Many homeowners who could benefit from refinancing are unable to do so, and the paper credits recent changes in HARP with helping in this area but suggests possible further expansion to borrowers whose existing mortgages are not guaranteed by the GSEs even though this raises a host of risk management issues.
…An alternative would be aggressively facilitating refinancing for underwater borrowers who are current on their loans, expanding modifications for borrowers who are struggling with payments, and providing a streamlined exit from homeownership for borrowers who want to sell their homes.
…It is clear from the conclusion to the paper that the Fed is not just searching for short-term solutions to the current market disruptions, but a fundamental restructuring of the system so that these problems are better packaged for management in the future.

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