New York Fed President's Housing Proposals

With the housing market still dragging the economy down, more and more voices are calling for the government to offer relief.  One of the latest and loudest is William Dudley, New York Fed President and Chairman of the Federal Open Market Committee, which sets interest rates. In a January 6 talk, Dudley described the housing market as a key factor behind the frustrating slow recovery of the US economy, and called for “further housing-related policy interventions that would help stabilize home prices, improve the housing outlook and generate an earlier recovery in housing activity.

In making the case for housing intervention he suggested measures which would “improve access to mortgage credit, reduce the obstacles to refinancing, lessen the flow of homes into foreclosure through bridge financing and accelerated principal reduction, and facilitate the absorption of REO back into use as owner or renter-housing.”

The last, REO-to-rental conversions, could offer great opportunities for real estate investors.

According to Dudley, an interagency group which includes the Federal Reserve is working on a program. Under consideration are several proposals:  investors could be encouraged to purchase REO to be made available as rental housing.  Fannie Mae and Freddie Mac could increase the number of loans offered to individual investors, provided the investor puts up an adequate amount of equity for each mortgage. And REO properties in a given locality could be bundled for sale.

“The government might consider a package of tax incentives for purchases of REO that are used as rental properties. Such incentives might include a reduction of the current 27-½ year depreciation period and/or a reduction of capital gains tax liability if the property is held for a minimum period, such as five years.”

In spite of all the calls for government help, experts disagree on just how much the government can help the real estate market. But that doesn’t mean that they’ll stop trying, in fact the President had some new ideas in his State of the Union speech. Next time we’ll examine the president’s proposal.