Large-scale disposition of real estate-owned properties is needed to stabilize housing, according to the Mortgage Bankers Association. In a letter to the Federal Housing Finance Agency, the trade group said REO should be pared down in "an open and transparent process that can be easily implemented." MBA President and CEO David Stevens said the imbalance in housing supply and demand must be solved before the country can enter a period of sustained economic growth. The MBA also supports bulk investor sales to help alleviate the REO inventory. "Today the nation faces a disproportionately large inventory of homes with additional 'shadow inventory' to come on line soon, in the face of a weak job market and weak housing demand," Stevens said. "Getting more REO properties into the hands of owner-occupiers would be the best option for stabilizing neighborhoods." The MBA puts the shadow inventory of mortgages delinquent 90 days or more or already in the foreclosure process at about 4 million homes. With about 1 million to 1.2 million foreclosure sales and short sales a year, the MBA estimates it will take three and half to four years to move through this inventory overhang. Some of the recommendations the trade group sent to the FHFA include a heightened focus on providing preferential financing to resident owners; expanding finance options and incentives for local investors; increasing protections for investors against fraud; and improving transparency. Stevens warned federal rules and regulations regarding qualified mortgages could further tighten underwriting requirements for the first-time homebuyers and minority homebuyers, who "are often the engine in the purchase money market" and have been hit the hardest by the recession. "For the time being, the country cannot rely on these populations to fuel the housing recovery," he said. "Thus, as our historical home-buying population is declining, the need for rental housing is growing, rental vacancy rates are dropping and the economy is stagnating." Therefore reducing the overhang of distressed properties is a priority, according to the MBA. "Existing government programs should be modified to support financing and availability for local investment," the MBA wrote in the letter. "Providing affordable, responsible financing options to investors not only eliminates REO properties, but also empowers neighborhoods by giving local residents an increased stake in its success. These tools would be especially beneficial in older, urban neighborhoods that face the challenges of aging housing stock and neighborhood blight.” The MBA said one way to spur investors to rehab and rent or sell properties quickly would be to have Fannie Mae, Freddie Mac or the Federal Housing Administration escrow a percentage of investor proceeds until a predetermined time period and impose a penalty if the property isn't rented or sold. "Being able to rent the home would indicate that the property met local code requirements without Fannie Mae, Freddie Mac or FHA having to perform on-site inspections," the trade group wrote in the letter to FHFA Acting Director Edward DeMarco. Others have also weighed in on the FHFA's request for information. The National Association of Women REO Brokerages said programs should be skewed to short-term rentals of three to five years. Radar Logic also sent a proposal supporting a restructuring of seriously delinquent mortgages. The mortgages should be bundled into debt and equity securities that can later be sold to investors or held by the government as investments, Radar Logic said. Write to Jason Philyaw. Follow him on Twitter: @jrphilyaw