Recent Federal Reserve proposals to bolster the flagging US housing market could benefit the private-label mortgage-backed securities market, says Fitch Ratings.
The Fed white paper, The U.S. Housing Market: Current Conditions and Policy Considerations published on January 4 recommends policies that would limit the growth of the inventory of foreclosed homes, make mortgage credit easier to access, and limit the flow of homes into foreclosure.
Overall we believe these recommendations could be a net positive for private-label RMBS because they would primarily reduce distressed housing inventory and some could lessen the downward pressure on prices.
The primary recommendation of the white paper is a government-facilitated REO-to-rental program, either through direct rentals or third-party sales. While we believe this idea has merit, as it could potentially reduce the number of distressed properties for sale, it would face some operational challenges. A direct rental program could be an undertaking of some magnitude and cost for an REO holder due to the staffing and property management demands associated with large-scale property rental programs.
While a third-party sales program could minimize these direct costs, an investor’s ability to secure financing and the lower bids for bulk REO present a different set of challenges. Lastly, a program subsidy may not be politically well-received if it were to lower the recoveries otherwise achieved through sales to owner-occupants.
For details, see Fitch: Federal Reserve Recommendations Could Benefit RMBS