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Administration to Announce Plans to Seek Rental Option Ideas on Foreclosed Homes

Source: WSJ - Nick Timiraos

Posted on 10 Aug 2011

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Officials have revealed that the Obama administration will announce plans today to seek investors' ideas for turning thousands of foreclosed properties owned by government-backed entities into rental homes.

The move is intended to put a floor under declining home prices by creating a way to deal with hundreds of thousands of potential foreclosures in coming years.

Mortgage giants Fannie Mae and Freddie Mac sold a record 100,000 homes during the second quarter. Together with the Federal Housing Administration, the entities owned about 250,000 homes at the end of June, or around half of all unsold, repossessed properties. Another 830,000 homes backed by the entities are in some stage of foreclosure, according to Barclays Capital.

The Federal Housing Finance Agency, which regulates Fannie and Freddie, will issue the formal "request for information" with the administration to solicit proposals that shrink the glut of foreclosed properties weighing on the residential market.

Banks are usually faster than mom-and-pop sellers to cut prices in order to unload properties quickly. In many hard-hit markets, more than half the sales have been made to non-owner-occupant investors—at discounts. The upshot is that home prices will continue to fall if many properties continue to be sold out of foreclosure. That has made it harder for traditional sellers to sell their homes at prices potential buyers have agreed to because foreclosures are driving down appraised values, killing some agreed-upon deals at the closing table.

"The process by which you sell foreclosures is largely determining what happens to home prices," said Oliver Chang, head of U.S. housing strategy at Morgan Stanley.

One proposal would sell packages of hundreds or thousands of foreclosed properties in bulk to investors that agree to rent them out. That approach is preferred by the Department of Housing and Urban Development, which is taking back properties as defaults mount on loans backed by the FHA.

Another approach would let investors enter joint ventures with Fannie or Freddie to invest in a pool of converted rental homes. A national property-management business would handle day-to-day landlord responsibilities. Investors would pay for rehabbing and maintaining properties and would share revenue from monthly rental income and the ultimate sale of the property. Such a joint venture would be modeled on the Resolution Trust Corp., which sold failed banks' assets in the early 1990s.

With Congress unlikely to approve new spending to help the economy, the federally backed loan giants are one of the administration's few levers for addressing the housing market. Rental initiatives would mark an aggressive step to clear the backlog of foreclosed homes, which many economists call the most significant hurdle to a housing recovery.

While the homeownership rate in the U.S. has fallen to around 66%, from a peak of 70%, it stands at less than 60% after excluding delinquent borrowers, according to Morgan Stanley analysts.

With fewer traditional buyers today able to qualify for loans, "you have to get investors to pick up the differential," said Laurie Goodman, senior managing director at Amherst Securities Group LP.

One question is whether investors will offer prices high enough to justify participation by Fannie and Freddie. While significant amounts of capital have formed on the sidelines to buy pools of foreclosed properties from hedge funds such as New York-based Och-Ziff Capital Management Group LLC,

Fannie and Freddie have resisted bulk sales because they would trigger big upfront losses for the government. That reluctance has kept out institutional investors large enough to execute a rent-and-hold strategy.

Instead, the main outlets for foreclosed properties are retail listings or public foreclosure auctions, also known as trustee or sheriff sales. Two years ago, investors began scooping up cheap properties at auction in hopes of quickly reselling them for a profit. But falling prices have made flipping harder to pull off, and more distressed-property investors have turned to buying and renting out homes.