The Chairman Speaks: Federal Reserve Chairman Ben Bernanke addressed a packed audience of builders and suppliers at the 2012 International Builders’ Show.
The Chairman Speaks: Federal Reserve Chairman Ben Bernanke addressed a packed audience of builders and suppliers at the 2012 International Builders’ Show.

Federal Reserve Chairman Ben Bernanke used the International Builders' Show on Friday to restate the Fed’s contention that the pace of the U.S. economic recovery is linked inextricably to how quickly and sustainably the housing market improves.

Addressing a large audience of builders and suppliers gathered at the Orange County Convention Center in Orlando, Fla., Bernanke reiterated many of the points about how to cure what ails housing that the Fed made in a white paper on housing it delivered to Congress on Jan. 4. However, he cautioned his audience, “there just isn’t a single solution” to the problems that plague the housing industry, partly because those problems “interlock with each other.”

Bernanke’s speech touched on several of those now-familiar problems: how sinking home values have constrained demand; how foreclosures continue to put downward pressure on home prices and have wreaked havoc on the economy in general and, more specifically, on neighborhoods around the country; how creditworthy borrowers—including home buyers, builders, investors, and developers—are being left stranded by banks unduly strangling their mortgage lending.

“Fewer than half of lenders are offering mortgages to borrowers with a FICO score of 620 and a down payment of 10%, even though such loans could be within the [government-sponsored entities’] purchase parameters,” he said. During the question and answer period, Bernanke added that while a certain amount of credit tightening had been justified during the country’s economic downturn, “the pendulum has swung too far in the other direction.”

In his speech, Bernanke was careful to note that the goal of the Federal Reserve is to offer “guidance” to policy makers, and not necessarily solutions. However, he did restate some ideas the Fed has advanced recently that could help strengthen the housing sector.

One is the so-called “REO-to-rental” programs, through which foreclosed properties held by Fannie Mae and Freddie Mac (which control about half of the outstanding REO inventory) and banks (which as of last September had $11.4 billion in residential REO properties on their balance sheets) would allow those properties to be rented out. REO-to-rental is “not a silver bullet,” he conceded, “but the programs appear to have some potential for success.” As of last November, 60 metro areas each had at least 250 REO properties for sale by Fannie, Freddie, and the Federal Housing Administration, with Atlanta leading the way with about 5,000 units.

Bernanke stressed the urgency of dealing with foreclosed inventory, which currently accounts for around 30% of all home sales, because a new flood could be impending. There are more than four times the number of properties in the foreclosure process than the current level of REO inventory. And, he said, “We estimate that an additional 1 million foreclosed properties could be added to the REOs held by banks, guarantors, and servicers in each of the next few years.”

However, Bernanke also noted that REO-to-rental programs probably wouldn’t make financial sense to investors unless the investors can purchase clusters of properties. Right now, though, banks and regulators are limiting investors’ borrowing to no more than four properties, which in turn limits these conversion programs to already well-capitalized companies such as big public builders or private equity. Bernanke called these limitations “counterproductive” because they keep out creditworthy investors who are capable and willing to improve these properties for sale or lease.

The Federal Reserve is contemplating issuing guidance to banking organizations and examiners to clarify supervisory expectations regarding rental of residential REO properties by such organizations.

Another “promising option” for reducing foreclosure inventory, said Bernanke, might be land banks, which are government entities that can buy and sell land, clear titles, and accept donated properties. Right now, though, there aren’t enough of these banks, and many of those that do exist don’t have the financial wherewithal to handle big amounts of foreclosed properties.

Notably absent from Bernanke’s speech was any detailed discussion about the government’s newly aggressive efforts to accelerate mortgage modifications in order to keep as many owners as possible in their homes.

But Bernanke was unambiguous about the need for policy makers and the private sector to work together to find answers that will reinforce a still-weak housing market. “We need to continue to develop and implement policies that will help the housing sector get back on its feet,” he concluded.

John Caulfield is senior editor for Builder magazine.

Learn more about markets featured in this article: Orlando, FL.