(Updates with comments by Duke in ninth paragraph.)
Sept. 1 (Bloomberg) -- Federal Reserve Governor Elizabeth Duke called for government efforts to promote the rental of foreclosed homes, saying a recovery in the U.S. housing market hinges on clearing the backlog of such properties.
“We need to deal with the unprecedented number of loans in or still entering the foreclosure pipeline, the disposition of properties acquired through foreclosure, and the effect of a high percentage of distressed sales on home prices,” Duke said in a speech today in Washington. “We, as a nation, currently have a housing market that is so severely out of balance that it is hampering our economic recovery.”
Duke threw her support behind an initiative of Fannie Mae, Freddie Mac and the Federal Housing Administration, which last month issued a joint public appeal for suggestions on managing their inventory of foreclosed homes and turning many into rental units. Fannie and Freddie, government-sponsored enterprises, own about a third of the country’s nearly 800,000 foreclosed properties.
“The weak demand in the owner-occupied housing market and the relatively high demand in the rental housing market suggest that transitioning some REO properties to rental housing might benefit both markets,” Duke said, referring to real estate owned by lenders.
“Achieving a cost-effective program may require obtaining a critical mass of properties -- perhaps a couple hundred or more -- within a limited geographic area,” she said. Because of the large foreclosure holdings of the GSEs, the government could “achieve the necessary scale in a number of markets.”
Duke didn’t comment on the near-term U.S. economic outlook or monetary policy in her remarks at a housing conference sponsored by the Fed Board of Governors.
U.S. stocks swung between gains and losses, after the Standard & Poor’s 500 Index rose 0.9 percent earlier, as a report showing growth in manufacturing bolstered optimism in the economy. The S&P 500 rose less than 0.1 percent to 1,219.69 at 12:34 p.m. in New York.
Duke said in response to audience questions that efforts to mitigate “frictions” that are preventing the refinancing of many mortgages wouldn’t harm the market for mortgage-backed securities.
“I don’t view changing that dynamic as being harmful to the markets,” she said.
Home-loan rates fell two weeks ago to the lowest in Freddie Mac records dating to 1971 amid concern that the U.S. economy is slowing. The low borrowing costs have done little to lift the residential real estate market, which is weighed down by rising foreclosures, tighter lending standards and a jobless rate that exceeds 9 percent.
The rate for a 30-year fixed loan remained at 4.22 percent in the week ended today, Freddie Mac said in a statement. The average 15-year rate decreased to 3.39 percent from 3.44 percent, according to the McLean, Virginia-based mortgage- finance company.
Mortgage applications dropped 9.6 percent last week, the biggest weekly decline since January, a Mortgage Bankers Association index showed yesterday. The group’s refinancing gauge fell 12 percent, while a measure of purchases rose 0.9 percent from the lowest level since December 1996.
“In many markets, house prices have fallen to such an extent that better recoveries may result from renting properties rather than selling them,” Duke said at a housing conference sponsored by the Fed Board of Directors.
Narrow Best Interest
“In other markets, converting REO properties to rentals may not be in the narrow best interest of financial institutions or mortgage investors but may be in the best interest of local communities,” she said. “For these markets, it may be useful to consider the possible role of new incentives and, if so, what form those incentives might take.”
U.S. house prices decreased in the year ended in June at a slower pace than in the prior month, a sign the market may be stabilizing. The S&P/Case-Shiller index of property values in 20 cities fell 4.5 percent from June 2010, after a 4.6 percent drop in the 12 months ended May that was the biggest since 2009, according to a release this week.
Home prices remain 32 percent below their peak level in July of 2006, according to the index.
New Home Sales
The census bureau reported that builders were selling new homes at a pace of 298,000 houses a year in July. The level of sales is little above the 48-year low of 278,000 reported in August 2010, and 79 percent below the peak of 1.4 million sales in July 2005.
Duke said that Fed supervisors may need to reconsider their usual advice that financial institutions sell their foreclosed properties.
“Conditions are unusual enough that it might also make economic sense to clarify existing expectations to recognize that in some cases converting a portion of residential REO to rental may be a reasonable option for financial institutions,” she said.
Duke, 59, was appointed to the Fed board by President George W. Bush. Before that she was executive vice president and chief operating officer at TowneBank, a Virginia-based community bank. She is also a former chairman of the American Bankers Association.
--With assistance from Prashant Gopal in New York. Editors: James Tyson, Kevin Costelloe
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