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Fed's Housing Fix Means Everyone Loses

Stocks in this article: BAC JPM WFC FNMA.OB FMCC.OB

NEW YORK ( TheStreet) -- The Federal Reserve Chairman Ben Bernanke on Wednesday proposed policies that would force a recovery in housing, but cautioned that there was no single solution to the housing market's problems and that everyone from investors to taxpayers would need to feel the pain.

In a 26-page white paper, the Fed outlined ways to ease some of the pressures afflicting the housing market.

While some of the weakness was due to weak labor market conditions and poor demand, policies that would address the excess inventory of foreclosed homes, borrower access to mortgage credit and inefficient foreclosure procedures should be considered, the central bank said.

Still, while policy action in these areas could facilitate the recovery of the housing market, "economic losses will remain, and these losses must ultimately be allocated among homeowners, lenders, guarantors, investors, and taxpayers," the Fed cautioned.

Some of the proposals in the white paper have been discussed before, including one that looks at the conversion of foreclosed homes to rental units. "..The large inventory of foreclosed or surrendered properties is contributing to excess supply in the for-sale market, placing downward pressure on house prices and exacerbating the loss in aggregate housing wealth. At the same time, rental markets are strengthening in some areas of the country, reflecting in part a decline in the homeownership rate," the paper noted.

"Reducing some of the barriers to converting foreclosed properties to rental units will help redeploy the existing stock of houses in a more efficient way. Such conversions might also increase lenders' eventual recoveries on foreclosed and surrendered properties."

The regulator is considering issuing guidance to banking organizations and examiners to clarify supervisory expectations regarding rental of residential REO properties by such organizations while such circumstances continue (and within relevant federal and statutory and regulatory limits).

As of September 2011, U.S. commercial banks had $10 billion in residential REO properties on their balance sheets, while savings and loans had an additional $1.4 billion. But serviced-for-others REO portfolios managed by banking organizations are significantly larger than their owned portfolios.

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