Federal Reserve Conditionally Approves of Banks Renting Out Foreclosures

The Fed has approved of banks and mortgage companies renting out more of the homes they’ve foreclosed upon, instead of just selling them outright. This news come from the The Wall Street Journal. Normally, financial institutions would just unload their real estate-owned (REO) inventory so they don’t have to deal with the hassles, risk, and management responsibility of dealing with individual properties and those pesky tenants. But now they have an additional option to become landlords!

This decision is being pushed by the politicians who believe this will help homeowners in trouble and renters who are facing increasing rental rates. Our elected officials recommend that banks foreclose on homes, but then rent them back to the owners so that the owners don't end up out of the street. These politicians also see hundreds of thousands of empty REO properties that could be leased out to increase the supply of rental homes and ease the ongoing rental rate increases currently filtering through to tenants.

The merits of each those plans are subject to debate, but one thing is clear: banks own a lot of empty properties and will soon own more. These properties that could be listed for sale and flooded onto the market, which might cause more depressing of prices, or they could be rented out, which may help buoy prices.

But even with politicians and market forces pressing the banks to rent out the homes, they really needed their regulator’s approval to do this on a mass scale. And now, they have it! The Federal Reserve has given the plan a thumbs up, which is good news for the banks that believe it is a good idea. In addition, it paves the way for the politicos to push because there's a widespread belief in politics that if the Fed approves it, it must be a worthwhile idea.

However, each bank has to make its own risk return decisions on whether to rent out the properties or just unload them for sale in the marketplace. There are many factors that impact their decision-making and analysis. Unfortunately, renting and managing individual properties has never really been successfully done by big companies. This is true even for ones that have a significant profit motive, of which the banks do not. A bank’s motive is to preserve value. If the banks try the rental game, they will find out quickly that it is time-consuming, expensive to manage, fraught with issues related to tenants, and probably something they should have avoided. Then, a couple years down the road, they’ll probably finally say, "Enough is enough!" and just unload them!

The end result is that this move of approving the rental of REO is just another politically inspired program, by both sides, to support the housing market. In theory, this is a good thing and noble cause. However, rarely do government programs work as intended, nor at reasonable costs and/or profits, and little has worked to help the housing market since the crisis started. So the Feds may approve banks renting out REO, but let’s hope that for the sake of the housing market, the banks will skip it and sell them off in a quick and orderly fashion instead.