Federal Reserve Issues Policy Statement on Foreclosures as Rentals

The general policy of the Federal Reserve is that banking organizations should make every effort to dispose of foreclosed properties and get them off their books as quickly as feasibly possible.


However, holding onto these properties and renting them out to tenants may be the way to go “in light of the extraordinary market conditions that currently prevail,” according to a statement issued by the Fed Thursday. Statutes and Federal Reserve regulations permit rental of residential properties acquired in foreclosure as part of an orderly disposition strategy, the central bank noted. The Fed acknowledged that some lenders might find it beneficial to make greater use of rental activities than they have in the past given the large volume of distressed residential properties and higher demand for rental housing in many markets.
Lenders overseen by the Fed may rent real estate owned (REO), also known as other real estate owned (OREO), properties within legal holding-period limits without actively marketing the property for sale, provided suitable policies and procedures are followed, according to the Fed’s statement.
To the extent that REO rental properties meet the definition of community development under the Community Reinvestment Act (CRA) regulations, lenders would receive favorable CRA consideration. In all respects, banking organizations that rent out their REOs are expected to comply with all applicable federal, state, and local statutes and regulations, the Fed stressed. The Federal Reserve says it expects lenders to evaluate the overall costs, benefits, and risks of renting out REOs and weigh their decision in the context of the local market environment, the condition of individual properties, and the lender’s ability to engage in rental activity in a safe and sound manner. The Fed’s policy statement, in providing guidance to banking organizations and examiners, also describes specific supervisory expectations for lenders with a large number of REO rental properties, generally more than 50 properties available for rent or rented.
The Federal Reserve’s policy statement applies to banking organizations for which the U.S. central bank is the primary federal supervisor, including state member banks, bank holding companies and their non-bank subsidiaries, savings and loan holding companies and their non-thrift subsidiaries, and U.S. branches of foreign banks.

 

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