elizabeth a duke : rebalancing the housing market speech by ms elizabeth a duke, member of the board of governors of the federal reserve system, at the federal reserve board policy forum : “ the housing market going forward : lessons learned from the recent crisis ”, washington dc, 1 september 2011. * * * good afternoon. i ’ d like to join my colleagues in welcoming you to the federal reserve board. this policy forum, “ the housing market going forward : lessons learned from the recent crisis, ” has been designed to connect lessons learned from the recent past with policy alternatives that may affect the market for years to come. determining the key lessons and getting this connection right are important, and as you have already heard, perhaps not as easy as it might sound. i would like to offer some suggestions that i think could help. before i begin, though, i should clarify that the ideas i will be discussing do not necessarily reflect the opinions of my colleagues on the federal reserve board and that these suggestions should not be construed as policy of the board or the federal open market committee. there are many interpretations of the key factors that led to the current state of affairs, and there are a similar number of visions of what the future should look like. but, while it is important to learn from and avoid the mistakes of the recent past, we should not forget what did work for many years in the housing and housing finance markets. so, in crafting appropriate policy responses, an important starting point is to carefully analyze what we ’ re solving for. certainly we want a solution based on private capital, but the role of government in housing and mortgage markets will need to be defined before private markets will fully reengage. any policy solution will have to be evaluated in the context of its effect on both owner - occupied and rental housing markets. and as the policy conversations progress, it will also be important to maintain a focus on the demand side of the market – which is to say, all of us, as consumers of housing. finally, a national housing policy must also serve the needs of the segments of our society that have been historically underserved – low - income and low - wealth families, including disproportionate numbers of minorities and households headed by females. these longer - term questions are critical. but before we get to the longer - term solutions, we need to deal with the unprecedented number of loans in or still entering the foreclosure pipeline, the disposition

the relative weakness of the owner - occupied market and strength of the rental market along with the potential for a gse - fha program to solve the problem of insufficient scale in some markets, conditions are unusual enough that it might also make economic sense to clarify existing expectations to recognize that in some cases converting a portion of residential reo to rental may be a reasonable option for financial institutions. depending upon the conditions in their individual markets, i believe having such an option could allow for better outcomes for institutions – that is, a superior net present value compared with traditional disposition approaches – and could at the same time contribute to market healing. however, to be effective in promoting better outcomes, such an approach would require supervisors to clarify current supervisory guidance to address how existing standards might apply to the valuation of real estate converted to rental, the time limits applicable to such holdings, and other aspects of managing those properties. financial institutions with large portfolios might be able to achieve scale in some markets on their own or possibly leverage the scale of a gse - fha program if such a program was created ; smaller institutions should also have the flexibility to act in accordance with the conditions in their local markets. responsible reo management in addition to the consideration of conversion strategies at significant scale, there are steps that all reo holders can take today to ensure that they are not contributing further to the problems. they can and should make sure that they are adequately monitoring any thirdparty vendors with which they contract to maintain, market, or sell reo properties. certainly, the recent interagency review of servicers revealed the severe consequences that can result from failing to monitor third - party vendors. before converting reo properties to rental, reo holders could also consider “ first look ” types of programs to enable owner - occupants, public entities, and nonprofits windows of time to bid on available properties. a number of institutions have used such programs with successful results. and reo holders who sell large numbers of properties to investors should consider processes, such as those used by the gses, to screen and monitor bulk investors to reasonably assess their probable actions regarding maintenance and disposition after acquiring the properties. low - value properties so far i ’ ve talked solely about reo - to - rental as a solution for reo properties. but that ’ s not going to work everywhere. in particular, some properties are too damaged, or otherwise too low - value, to be sold as owner - occupied units or profitably converted to rental properties