–Updating With Duke Comments From Audience Q&A
–Vacant, Distressed US Properties at Extraordinary Level

By Claudia Hirsch

NEW YORK (MNI) – Federal Reserve Board Governor Elizabeth Duke
Friday said that in the wake of the U.S. housing crisis, certain areas
with high residential-property vacancy rates will require government
intervention to heal.

An “unprecedented volume of foreclosures” has “left us with an
extraordinary level of vacant and distressed properties,” Duke told a
luncheon audience at a distressed residential real estate conference
hosted by the Federal Reserve Bank of New York.

“In order to see the robust economic recovery we all want, we need
to deal effectively with the large volume of vacant and distressed
properties throughout the country,” she said.

“Certainly, different housing markets will recover in different
ways and at different paces,” Duke added. “In some areas, the private
market will lead the way, while in others, government will have to use
precious resources wisely to catalyze recovery.”

For its part, “I can assure you the Federal Reserve System will
continue to support recovery through the use of all its policy tools and
research capacity,” she said.

The costs of such government solutions must be weighed against the
“costs of doing nothing,” she said, and pointed to demolition and
conversion costs that taxpayers may ultimately bear.

But Duke also noted “signs of improvement” in U.S. housing
conditions this year, including rising home prices that have moved a
“noticeable number of underwater households … from negative equity to
positive equity.” Still, she cautioned that “these struggling
high-vacancy areas provide evidence of the hard work that remains.”

For-sale vacancies, however, are only one part of total vacancy
volume, she said.

“Many vacant homes are not on the market at all,” Duke said, and
noted those in the foreclosure process and bank-owned homes not yet for
sale, as well as those vacant for reasons unrelated to foreclosure.

“The stock of non-seasonal homes held off market is nearly two and
a half times as large as the for-sale vacant stock,” she said. This
component of vacancies has not declined “at all” in the past year, she
added.

The Fed governor said there is “no one-size-fits-all” solution to
the vacancy conundrum. Neighborhood stabilization efforts must take
different forms.

In what she called “housing boom” areas – metropolitan areas where
there are long-term vacancies among relatively newly built homes, and
where median incomes, home values and education levels are higher – a
useful solution could include conversions to rental units, especially as
the rental market tightens. In these areas, notably Phoenix, there are
signs of investor purchases that are resulting in more rental stock, she
said.

But Duke cautioned against “aggressive” investor activity that
could “crowd out potential homeowners, especially low- to
moderate-income households.” She praised government programs that offer
a “first look” window of time during which only non-investors can bid on
properties.

Turning to Baltimore, a “low demand” areas of high long-term
vacancy rates, Duke cheered the city’s initiative that includes an array
of approaches, including “targeted housing code enforcement to foster
redevelopment,” homebuyer incentives and, in certain hardest-hit
communities, demolition.

She also said that tighter, more prudent mortgage-lending standards
should not “unnecessarily dampen the housing recovery and
disproportionately affect creditworthy low-income and minority
homebuyers.”

Answering questions from the audience, Duke said “the policy focus
needs to remain squarely” on increasing the credit availability.

“Monetary policy works through the availability of credit.”

She said she is “not convinced” that the “return” to credit
availability will be as swift as in the past.

Duke said it is important for lenders to ensure that they “can
still make the irregular loan, one that does not fit into the box.” She
said stricter lending standards present barriers to these unusual loans
and narrow the types of loans made.

And larger banks’ and non-banks’ percentage of loan origination is
declining, she said, while some of the “slack is being picked up by
small lenders.”

Duke also said that the thorny issue of home-value appraisals
during the lending process is tough to solve. In some areas, appraisers
come from hundreds of miles away and without meaningful knowledge of the
particular market. Some states’ databases do not include sale prices,
she said. But she said that if upward home-price momentum builds,
appraisal prices will “improve.”

** MNI New York Newsroom: 212-669-6430 **

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