The Federal Reserve’s 26-page white paper has generated a lot of commentary, both pro and con, since being released on Jan. 4. While others spend time and energy debating whether or not it’s the role of the Fed to comment on or recommend policy, I find the content itself far more interesting.
One of the most interesting aspects of the white paper is that it’s one of the first efforts in Washington to take a broad view of all of the problems plaguing the housing market.
Most of the initiatives to date have focused on specific aspects of the housing market collapse—much like a doctor treating an individual symptom rather than the underlying disease itself. Whether or not you agree with all of the recommendations in the white paper (and there are some that I’d rather not see come to fruition), the simple fact that it attempted to address the entirety of the problem is a significant step forward.
The white paper addressed what are probably the three most vexing problems: the pipeline of foreclosures, the inventory of distressed homes and the challenging environment for credit and lending. And in all cases, the Fed made recommendations that merit further consideration.
To slow down the pipeline of foreclosures, the Fed suggested several highly controversial ideas, including refinancing programs that included principal balance deferral and/or reductions, the expansion of a HARP-like program to cover nonagency loans, increases in nonforeclosure disposition tactics such as short sales and deeds-in-lieu, and something which is particularly contentious in the mortgage servicing market—the ability to move loans from servicers who are “performing poorly” to other (presumably specialty) servicers.
To whittle down the inventory of distressed assets, the Fed discussed an expansion of land bank programs for nonsalvageable properties and a large-scale program to convert vacant REO properties into rental homes. The latter program would help stabilize home prices by reducing the number of distressed properties for sale and also meet an anticipated need for rental homes over the next several years.
While the Fed expressed concerns that an REO rental program would require government financing and significant discounting by lenders who currently own the properties, our analysis at Carrington suggests that neither of these is necessarily the case—that, in fact, there is capital available to buy these homes in bulk, at prices approximating current market value.
Interestingly, the Fed was most vague about how to remedy limited access to credit, or how to improve the environment for home loans, other than to suggest that lenders might want to loosen up underwriting standards to make them less daunting for the average homebuyer.
And with the newly energized CFPB about to make lending more challenging for nonbank lenders, who have been picking up the slack as large banks have exited the origination business, this is an area worth keeping an eye on.
All-in-all the Fed paper did a good job of diagnosing the illness plaguing the market, and presented some interesting ideas on how to make the patient feel better. But Dr. Bernanke, just like your personal physician, probably knows that the best he can hope for is to make some of the more troubling symptoms a little more tolerable while the disease gradually runs its course.
Rick Sharga is executive vice president, Carrington Holding Co.
