Fed Text: Encourages Banks to Consider Distress Rentals | ForexLive

WASHINGTON (MNI) ? The following are excerpts from a Federal
Reserve ?Policy Statement? Thursday regarding bank rentals of distressed
properties they hold in inventory:

Rental of Residential Other Real Estate Owned Properties

In light of the large volume of distressed residential properties
and the indications of higher demand for rental housing in many markets,
some banking organizations may choose to make greater use of rental
activities in their disposition strategies than in the past. This policy
statement reminds banking organizations and examiners that the Federal
Reserve?s regulations and policies permit the rental of residential
other real estate owned (OREO) properties to thirdparty tenants as part
of an orderly disposition strategy within statutory and regulatory
limits.

This policy statement applies to state member banks, bank holding
companies, nonbank subsidiaries of bank holding companies, savings and
loan holding companies, non-thrift subsidiaries of savings and loan
holding companies, and U.S. branches and agencies of foreign banking
organizations (collectively, banking organizations).

The general policy of the Federal Reserve is that banking
organizations should make good-faith efforts to dispose of OREO
properties at the earliest practicable date. Consistent with this
policy, in light of the extraordinary market conditions that currently
prevail, banking organizations may rent residential OREO properties
(within statutory and regulatory holding period limits) without having
to demonstrate continuous active marketing of the property, provided
that suitable policies and procedures are followed. Under these
conditions and circumstances, banking organizations would not contravene
supervisory expectations that they show ?good-faith efforts? to dispose
of OREO by renting the property within the applicable holding period.
Moreover, to the extent that OREO rental properties meet the definition
of community development under the Community Reinvestment Act (CRA)
regulations, they would receive favorable CRA consideration.3 In all
respects, banking organizations that rent OREO properties are expected
to comply with all applicable federal, state, and local statutes and
regulations.

Background

Home prices have been under considerable downward pressure since
the financial crisis began, in part due to the large volume of houses
for sale by creditors, whether acquired through foreclosure or voluntary
surrender of the property by a seriously delinquent borrower (distressed
sales). Creditors, in turn, often seek to liquidate their inventories of
such properties quickly. Since 2008, it is estimated that millions of
residential properties have passed through lender inventories. These
distressed sales represent a significant proportion of all home sales
transactions, despite some ebb and flow, and thus are a contributing
element to the downward pressure on home prices. With mortgage
delinquency rates remaining stubbornly high, the continued inflow of new
real estate owned properties to the market ? expected to be millions
more over the coming years ? will continue to weigh on house prices for
some time.

Banking organizations include their holdings of such properties in
OREO on regulatory reports and other financial statements. Existing
federal and state laws and regulations limit the amount of time banking
organizations may hold OREO property. In addition, there are established
supervisory expectations for management of OREO properties and the
nature of the efforts banking organizations should make to dispose of
these properties during that period. Risk Management Considerations for
Residential OREO Property Rentals In all circumstances, the Federal
Reserve expects a banking organization considering such rentals to
evaluate the overall costs, benefits, and risks of renting. The banking
organization?s decision to rent OREO might depend significantly on the
condition of individual properties, local market conditions for rental
and owner-occupied housing, and its capacity to engage in rental
activity in a safe and sound manner and consistent with applicable laws
and regulations.

Banking organizations should have an operational framework for
their residential OREO rental activities that is appropriate to the
extent to which they rent OREO properties. In general, banking
organizations with relatively small holdings of residential OREO
properties ? fewer than 50 individual properties rented or available
for rent ? should use a framework that appropriately records the
organizations? rental decisions and transactions as they take place,
preserves key documents, and is otherwise sufficient to safeguard and
manage the individual OREO assets. In contrast, banking organizations
with large inventories of residential OREO properties ? 50 or more
individual properties available for rent or rented ? should utilize a
framework that systematically documents how they meet the supervisory
expectations described in the next section.

All banking organizations that rent OREO properties, irrespective
of the size of their holdings, should adhere to the guidance set forth
in this section.

Compliance with maximum OREO holding-period requirements

Banking organizations should pursue a clear and credible approach
for ultimate sale of the rental OREO property within the applicable
holding-period limitations. Exit strategies in some cases may include
special transaction features to facilitate the sale of OREO, potentially
including prudent use of seller-assisted financing or rent-to-own
arrangements with tenants.

Compliance with landlord-tenant and other associated requirements

Banking organizations? residential property rental activities are
expected to comply with all applicable federal, state, and local laws
and regulations, including: landlord-tenant laws; landlord licensing or
registration requirements; property maintenance standards; eviction
protections (such as under the Protecting Tenants at Foreclosure Act);
protections under the Servicemembers Civil Relief Act; and
anti-discrimination laws, including the applicable provisions of the
Fair Housing Act and the Americans with Disabilities Act. Prior to
undertaking the rental of OREO properties, banking organizations should
determine whether such activities are legally permissible under
applicable laws, including state laws. When applicable, banking
organizations should review homeowner and condominium association bylaws
and local zoning laws for prohibitions on renting a property. Banking
organizations may use third-party vendors to manage properties but
should provide necessary oversight to ensure that property managers
fully understand and comply with these federal, state, and local
requirements.

Other considerations

Banking organizations should account for OREO assets in accordance
with generally accepted accounting principles and applicable regulatory
reporting instructions. Banking organizations should also provide the
appropriate classification treatment for their residential OREO
holdings. Residential OREO is typically treated as a substandard asset,
as defined by the interagency classification guidelines.11 However,
residential properties with leases in place and demonstrated cash flow
from rental operations sufficient to generate a reasonable rate of
return12 should generally not be classified.

(Footnotes excluded. The full text is available on the Federal
Reserve Web site, www.federalreserve.gov)

** MNI Washington Bureau: 202-371-2121 **

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