Foreclosure To Rentals? | Fed pushes bulk property sales to investors
What if Fannie Mae and Freddie Mac sold, in bulk, the more than 1,100 foreclosed Massachusetts properties they own to investors who promised to convert them to rental housing?
The Federal Reserve recently called on Congress to approve of such a program nationwide and encourage private lenders to participate. Action by Fannie and Freddie, the private, federally sponsored agencies that support the housing market, could have a significant impact because their “real estate-owned properties,” or REOs, account for about half of all REOs nationwide.
Housing experts think an REO rental program could help the Massachusetts market, but said there would be significant challenges to managing such a large-scale program.
“I think it’s a great idea, anything you can do to keep houses from being vacant, keep neighborhoods from being neglected I think is good,” said Timothy Warren, CEO of the Boston-based Warren Group.
No Slam Dunk
But there are reasons such a program has never been tried. Warren said it’s unclear if the properties’ owners would be willing to commit the resources necessary to manage a large portfolio of foreclosure rentals.
An REO program could be of particular significance to Central Massachusetts, which has a higher proportion of foreclosure-distressed communities than other areas of the state, though foreclosures declined in 2011.
Fannie and Freddie owned at least 242 foreclosed properties in the Worcester metropolitan area as of July, according to the Federal Housing Finance Administration.
North Brookfield, Winchendon, Fitchburg, Hardwick, Athol and Worcester all have more than 19 distressed housing units for every 1,000 units of housing, according to a November report by the Massachusetts Housing Partnership.
Timothy Davis, a research consultant for the partnership, said an REO rental program would have to overcome logistical challenges.
“One of the biggest challenges to converting these is the management,” Davis said.
Lenders would have to bring the properties up to a desirable condition to rent, and there is the question of exactly who would market and manage the properties. Additionally, he said, in more suburban and rural markets, there just may not be as much demand for rental units.
Davis noted in a recent report that more than half of all Massachusetts properties in foreclosure are becoming bank-owned, indicating little appetite among third-party buyers to purchase them, despite low interest rates.
Small investors are buying foreclosed homes and renting them out, but not on a large scale, the Fed wrote. There is no financing mechanism to buy a slate of rental properties, and private capital will likely be required.
The federal government could order Fannie and Freddie to sell off properties in bulk — and likely at a steep discount — because regulators placed the government-sponsored entities into conservatorship when it bailed them out in 2008.
A combination of tightened credit standards, low consumer confidence, a weakened job market and a glut of vacant homes for sale are all helping to stifle the housing market and a true economic recovery, the Fed wrote.
With home ownership on the decline and plenty of vacant foreclosure properties on the market, converting REOs to rentals could be a way for lenders to recover some of their mortgage losses and a way to strengthen the housing market.
The concerns raised by Warren and Davis are not the only challenges an REO rental program might face, the Fed acknowledged.
It’s difficult to assemble a portfolio of properties close enough geographically to achieve efficiencies of scale, the Fed authors wrote. Attracting bulk investors would require owners to make “significant price concessions.” And some properties are either too damaged or in poor locations to make them a good fit for renting.
Timing Could Help
But the central bank thinks an REO program could help address the economic challenge that foreclosures pose to the housing market and overall economy.
Timing could be important. Foreclosure activity slowed in the second half of 2011, but analysts attributed the slowdown to action by state attorneys general against banks for alleged abuses in their foreclosure processes. Lenders began to churn through their backlog again in the final few months of the year.
Now the number of REOs is expected to grow, as lenders work through the pipeline of delinquent mortgages, with another two million REOs predicted to hit the market by the end of 2013.
And there are plenty of homes underwater that could further fuel the numbers. Approximately 12 million homeowners in the country have negative equity, according to the Fed, which means the owners owe more than what the homes are worth.
Senior Staff Writer Brandon Butler contributed to this report.
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