Fed moves to encourage banks to turn foreclosures into rentals

The Federal Reserve has released guidelines that could encourage the practice of converting lender-owned foreclosed homes into rental properties.

By converting foreclosures to rentals with steady cash flow, banks could reduce the number of their “substandard assets,� a classification used by banking regulators to determine the health of banks.

The central bank also said that lenders could receive Community Reinvestment Act credit for providing housing to low-income and moderate-income people by successfully converting foreclosed homes into rentals.

The policies could help encourage a nascent move to turn banks’ foreclosure inventory into rental properties and then sell those homes to investors. The Fed earlier this year released a housing market white paper arguing that removing some of the barriers for converting foreclosures into rental properties could help stabilize the housing market.

Bank of America last month rolled out a foreclosure-to-rental pilot program for 1,000 homeowners who are headed into foreclosure in Nevada, Arizona and upstate New York. BofA has said it would extinguish the mortgages of troubled borrowers participating in this pilot program through transactions called “deeds in lieu of foreclosure� and then strike rental contracts with those borrowers. BofA will then sell those rental properties to investors.

Wall Street hedge funds and private equity firms are positioning themselves to snap up these rental units.

In other news, a federal judge approved the $25-billion foreclosure deal between major banks and state and federal governments. Under the settlement, reached in February, the lenders agreed to adopt new standards for loan servicing and provide relief for struggling homeowners.

The participating lenders are Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc.

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