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Posted by on Jul 22, 2011 in Real Estate Investing, REOs | 8 comments | Print Print

Rent the REOs?

Hat tip to daytrip for sending this along, from the wsj.com:

The Obama administration is examining ways to pull foreclosed properties off the market and rent them to help stabilize the housing market, according to people familiar with the matter.

While the plans may not advance beyond the concept phase, they are under serious consideration by senior administration officials because rents are rising even as home prices in many hard-hit markets continue to fall due to high foreclosure levels.

Trimming the glut of unsold foreclosed homes on the market is “worth looking at,” said Federal Reserve Chairman Ben Bernanke in testimony to Congress last week.

Nationally, home prices in May were 7.4% lower than a year earlier, but after excluding distressed sales, prices fell just 0.4%, according to CoreLogic Inc. Foreclosures and other distressed sales now account for about 30% of homes sold each month and sales from government-related entities make up about one third of that number.

“Adding more stock simply increases that overhang. If that can be avoided, it should be,” says Jared Bernstein, an economist who left the White House in April and is now a senior fellow at the Center on Budget and Policy Priorities, a liberal think tank in Washington. Because rents are firming up, “this idea could have some legs,” he said.

Renting out homes could cover the costs of holding the properties until they can be resold once markets stabilize, potentially turning a profit for mortgage titans Fannie Mae and Freddie Mac or the Department of Housing and Urban Development, which handles foreclosures on loans backed by the Federal Housing Administration.

But scattered-site rental programs could require the government to become a national landlord, an area where the mortgage firms have little experience. They also pose accounting challenges that could produce big upfront losses.

One proposal winning support among some federal officials would sell thousands of foreclosed federal properties to private investors who agree to rent them.  Investors would rehab homes, run the leasing process, and contract with national property management firms to handle day-to-day tenant demands.

The government could keep a stake in the venture, modeled on loss-share transactions by the Federal Deposit Insurance Corp. Officials have received interest from around a half-dozen private investors, according to people familiar with the matter.

HUD owned about 69,000 homes at the end of April and sold 11,000 homes in that month. Fannie and Freddie held another 218,000 at the end of March.

Analysts at Credit Suisse estimate that reducing Fannie and Freddie’s foreclosed-property sales to around 30,000 each month, from the current rate of 50,000, would cut total distressed sales by one third and avoid a further 3% to 5% decline in home prices.

By flushing foreclosed properties onto markets with few traditional buyers, Fannie and Freddie are “undermining their own recovery,” says John Burns, the head of a homebuilding consulting firm in Irvine, Calif., who backs the public-private rental approach.

8 Comments

  1. So lets see…

    1. Gov/Fed/Banks print money like crazy forcing commodity’s like houses price to go up.
    2. Gov/Fed/Banks print even more money to keep interest rates low.

    Now commodity prices have gone so high that no matter how low the interest rate is average joes can’t buy a house.

    Trying to show how nice/kind they are Gov/Fed/Banks rent the property back to people.

    And now check-mate…

    Gov/Fed/Banks control the people. Was it planned? Good thing Banks weren’t allowed to fail.

  2. Lets see, the goverment can try to adopt a plan to hold on to properties, and create another beauracracy to manage rentals…

    Or…., having failed to encourage enough owner occupiers to buy, they could adopt programs and polices that would encourage investors to buy the excess inventory.

  3. Sounds like turning the country’s housing market into a massive public housing project. What a nightmare.

    I’m currently investing by buying some excess distressed inventory in Georgia, I hope this idea never gets beyond theory.

    Between this and the talk of eliminating mortgage interest deductions – there is some really scary stuff being tossed around

  4. So they want to decrease rents by renting foreclosures?

    If they increase rental properties, rents will fall and it will drive out investors. What will happen is investors will start selling rental properties that are under performing and at the same time not purchase any new properties.

    Another plan to “stabilize the housing market” that will surely destroy it further.

  5. This will not be a good fix for this country… we need to let the housing market iron itself out with time… Stop trying to fix and let it heal! Just need to let this cycle through. If they go forward with this plan, I think we will soon be calling each other comrade!!! I believe shadash is on to something!

  6. How is it that REOs are already getting fixed up and many are turning into rentals. Without any top down planners getting involved. Some kind of miracle the market is huh?

    If they want to do something, I say let these move through the system faster. It’s a bigger problem is the homes rotting in limbo still not foreclosed, not for sale, not doing anything.

  7. Thanks Jim, appreciate your blog and I’ve tried to refer potential clients to you (unsuccessfully as of yet.)

    Good point above about this plan decreasing rents and lowering demand from investors. Basic Supply/Demand, which is also ignored by this amusing line from the article:

    “Renting out homes could cover the costs of holding the properties until they can be resold once markets stabilize.”

    Yet it’s precisely these homes that are preventing the market from stabilizing!!! Sell them now or sell them later, we all know they are there and the market won’t “stabilize” – whatever that means – until we get back to a normal supply scenario.

    Everything the government has done has pushed out that date of stabilization further into the future, causing more buyers to wait on the sidelines.

  8. Short of the Federal Gov’t employing people to tear down houses and empty commercial RE (in a WPA type program), this is the best and fairest idea I’ve heard in a long time. It helps people get into affordable housing and some semblance of financial stablity (or at least predictability). The benefits to communities will be huge, and include stronger neighborhoods, which should bring a more predictable RE market in the longer term. IMO, it’s about time the average American gets a chance to benefit like the multitudes of unscrupulous RE profiteers wo made out so well during the bubble.

Trackbacks/Pingbacks

  1. Government Considers Ways To Rent Foreclosed Homes - GridironFans.com - [...] month and sales from government-related entities make up about one third of that number. Source: BubbleInfo.com …

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