Could Foreclosures to Rentals turn this market around?

  • 9 years ago
  • Blog
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In an article by Alejandro Lazo published Friday in the LA Times, it is reported that “The Federal Reserve has released a policy statement that could encourage the practice of converting lender-owned repossessed homes into rental properties.  By converting foreclosures to rentals with steady cash flow, banks could reduce the number of their “substandard assets,” a classification used by banking regulators to determine the health of banks.  The central bank also said in its statement Thursday that lenders could receive Community Reinvestment Act credit for providing housing to low- and moderate-income people by successfully converting foreclosed homes into rentals.  Taken together, the policies could help encourage a nascent move to turn banks’ foreclosure inventory into rental properties and then sell those homes to investors. The Fed earlier this year released a housing market white paper arguing that removing some of the barriers for converting foreclosures into rental properties could help stabilize the housing market. (article continues . . . http://www.latimes.com/business/money/la-fi-mo-fed-foreclosures-20120406,0,1480992.story?track=rss).

This is an interesting thought.  Up until now the widely held belief is that a shadow inventory still haunts the current real estate market.  With prices well off their 2006 peak, foreclosures and short sales have dominated both market prices as well as news headlines.  But with banks’ improved balance sheets and new alternatives to dumping their troubled assets – such as renting out bank owned properties – this dark cloud of the shadow inventory may not continue to depress the real estate market as expected.  In fact, with improving lending standards and slowly improving job and wage growth, home ownership is starting to look better than it did less than a year ago.  However, problems remain.  In many South Bay and Palos Verdes neighborhoods inventory is still a problem – there are actually not enough homes for the available buyers.  That hasn’t lead to major price increases, indicating that buyers are still extremely price conscious and even skittish about jumping back into the real estate market.  Another major problem still lies with qualifying for a mortgage.  Many past homeowners who walked away from their homes are still in a credit hangover, with scores too low to take advantage of the historically low interest rates.  Finally, as home values still struggle to recover, many would be sellers are still underwater as the result of cash-out refi’s and purchases at market highs and are therefore unable to sell until prices recover.

What does this all mean?  While a recovery is by no means guaranteed, the fact that banks are seeking alternatives is promising.  The old adage that necessity is the mother of invention still rings true – although renting homes is not a new idea, renting out bank owned properties may be a new look at an old problem.

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