Should Fannie and Freddie Become Landlords?

Dude, uh, tomorrow's already the tenth.

In the ongoing debate over housing finance reform, people have floated a variety of proposals aimed at solving the foreclosure problem and developing an improved securitization and finance system.  Today we have another new idea, this time from Federal Reserve Governor Elizabeth Duke, via Bloomberg’s James Tyson.

Duke said one of the best ways to stabilize areas hurt by foreclosures is to incentivize lending institutions to rent homes they have seized as a result of foreclosure.  An excerpt from the article:

“It is not sufficient, given current economic conditions and the significant needs of our neighborhoods, to do things the way we have always done them,” Duke said today in a speech at a Fed conference in Washington. “Including rental options among the mix of stabilization strategies makes particular sense at a time of high unemployment.”

Duke recommended rent-to-own programs as well as turning current distressed owners into renters in order to keep vacancies low and avoid the blight and crime associated with high levels of vacancy.  Over 4.5 percent of homes in the United States are in foreclosure, and nearly 1 in 10 U.S. mortgages are delinquent.

Further complicating matters is the massive excess supply of homes and the low level of demand for housing following the expiration of the first time homebuyer tax credit.  This situation, combined with the continued weak labor market is causing downward pressure on home values.  A reduction in home values could cause even more Americans to be underwater on their mortgage (owe more on their mortgage than their house is worth).  Underwater borrowers are far more likely to default than those who have equity in their house, so many people worry we could see another wave of foreclosures in the near future.

While turning major lenders and entities such as Fannie Mae and Freddie Mac into giant landlords may not be ideal, it is a proposal that merits some consideration.  I have yet to see a breakdown of the costs that would be associated with such a policy, and that will be the ultimate determinant of whether or not this idea makes any sense.  At this stage in the game, it would be wise for policy-makers to entertain any and all ideas, because nothing that has been tried up to this point has made any significant headway towards solving our current housing problems.

What do you think of this proposal?  Let me know in the comments section below.