Editor’s note: The following item is republished with permission of AOL Real Estate. See the original article: "Foreclosure Fire Sale: Will Bulk ‘REO to Rental’ Program Fly?"
By Stefanos Chen
With an estimated 3.6 million more foreclosures expected over the next two years, the government-backed mortgage giants have a proposition for you: How’d you like to take a couple (hundred) homes off their hands?
In a recently announced program, the Federal Housing Finance Agency, which regulates the quasi-government lenders Fannie Mae and Freddie Mac, is offering qualified investors the opportunity to buy pools of foreclosed homes, provided they agree to rent the properties for a certain number of years.
In its pilot run, the foreclosure-to-rental initiative aims to shift some of the burden of managing foreclosed and vacant homes from Fannie Mae to private investors, who’ll be tasked with maintaining the properties. Freddie Mac and Federal Housing Authority loans may be considered at a later stage of the program.
By mandating that the properties be used as rentals, the program seeks to lower rents where foreclosures have hiked up demand and to stabilize communities in the hardest-hit areas.
As neighbors of foreclosure victims know too well, vacant homes drag down prices and attract all manner of blight. Home prices nationwide have fallen 33 percent since the height of the bubble in 2006, according to the Federal Reserve.
Along with corporations, investment trusts and banks, individual investors can also get in on the action, as long as they’re worth at least $1 million (though the actual barrier to entry may be higher). See the pre-qualification form here.
Behemoth bundles
But even for the largest and savviest investors, the mortgage giants’ first major foray into the foreclosure-to-rental space could prove too costly.
Donna Robinson, a Cartersville, Ga.-based real estate investor and consultant, expects the foreclosure pools to range anywhere from 500 to 1,000 properties — anything smaller, she said, wouldn’t be worth bundling. Fannie and Freddie owned about 180,000 homes at the end of September, The Wall Street Journal reported. Add in FHA-owned homes, and the number rises to 215,000. Even at 1,000 homes apiece, it would take more than 200 mega-investors to work their way through the current backlog.
And while there have been reports of options being available for smaller investors, the onus will still be on major investment firms to manage the bulk of the properties, Robinson said. A spokesperson for the FHFA would not confirm the expected size of the pools.
Geographic sprawl
If the pools are as large as Robinson anticipates, then distance is the investor’s biggest enemy. While real estate investment trusts (REITs) may be comfortable in managing several hundred-unit commercial properties, operating 500 single-family residential homes (defined as up to four-unit properties) spread out across a city — or even nationwide — is an entirely different story.
Local compliance issues and getting properties up to snuff across a large market will take time. Investors could spend upward of a year waiting for clearance to rent their properties while carrying the day-to-day costs of maintenance, insurance and taxes, Robinson said.
Yet with risk comes reward, and Robinson expects investors to get steep discounts on their purchases. "No pro is going to pay anything above 30 to 40 cents on the dollar, tops," she said.
In the Works
With the initiative still in its infancy, much can change before the program rolls out. One way Fannie might avoid having to make huge price concessions to investors is to offer them a stake in the pools while keeping a share of the returns, suggests Nick Timiraos at The Wall Street Journal.
But whichever route the FHFA ultimately chooses, the program’s success remains tethered to several larger housing factors, said Celia Chen, an economist for Moody’s Analytics Inc.
Even though foreclosures will pick up in the early part of the year, home prices should start to stabilize toward the end of the year as part of the $25 billion mortgage settlement is used toward principal reduction, she said. The REO-to-rental program will take awhile to kick into gear, and could benefit as a result.
But some analysts are less hopeful about the program. A report by Goldman Sachs suggests the effort will have "positive but modest" effects, with maybe a 0.5 percent increase in home prices within the first year, and a 1 percent increase in the second -– but that’s a best-case scenario, the report states.
Scope is also a factor in the program’s success. There are at least four times as many properties still in some stage of foreclosure as there are in the REO inventory, according to a January report from the Fed.
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