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Fed outlines policy for turning foreclosures into rentals

April 06, 2012|By Alejandro Lazo
  • The Federal Reserve this week released a policy statement intended to clarify rules for turning bank-owned homes into rental properties.
The Federal Reserve this week released a policy statement intended to clarify… (Joe Raedle / Getty Images )

The Federal Reserve has released a policy statement that could encourage the practice of converting lender-owned repossessed homes into rental properties.

By converting foreclosures to rentals with steady cash flow, banks could reduce the number of their “substandard assets,” a classification used by banking regulators to determine the health of banks.

The central bank also said in its statement Thursday that lenders could receive Community Reinvestment Act credit for providing housing to low- and moderate-income people by successfully converting foreclosed homes into rentals.

Taken together, the policies could help encourage a nascent move to turn banks’ foreclosure inventory into rental properties and then sell those homes to investors. The Fed earlier this year released a housing market white paper arguing that removing some of the barriers for converting foreclosures into rental properties could help stabilize the housing market.

Bank of America last month rolled out a foreclosure-to-rental pilot program for 1,000 homeowners who are headed into foreclosure in Nevada, Arizona and New York. BofA officials have said it will forgive the mortgages of troubled borrowers participating in this pilot program through transactions called "deed-in-lieu of foreclosure" and then strike rental contracts with those borrowers. BofA will then sell those rental properties to investors.

Wall Street hedge funds and private equity firms are positioning themselves to snap up these rental units.

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