Thursday, January 12, 2012

Six Questions on Foreclosure-to-Rental Programs

Wednesday’s Journal looked at how one private-equity firm is making a bet on renting out single-family homes acquired through foreclosure. In the coming weeks, federal policy makers could roll out pilot programs to further test the concept. Here’s a look at what’s involved:

What is the government considering?

Government officials solicited more than 4,000 comments from the public last year on potential initiatives that would take foreclosed properties off the market and rent them out. The initiatives are likely to focus only on loans backed by federal entities Fannie Mae, Freddie Mac, and the Federal Housing Administration.

There are two different types of programs that officials are likely to consider. Under the first, the FHA could sell properties in bulk to investors who agree to rent them out. Bulk sales have been rare largely because investors tend to demand deep discounts that sellers haven’t been willing to accept.

A more likely option for Fannie and Freddie, if they move forward with any pilot programs, would be to set up pools of properties in which third-party investors would take a stake. Investors could be responsible for handling maintenance and day-to-day operation of the rental pool, with the mortgage-finance giants sharing in some of the returns.

How many homes are we talking about?

Fannie and Freddie held around 180,000 homes at the end of September, down from around 235,000 one year earlier. The FHA held around 35,000 homes at the end of November, down from 55,000 one year earlier.

The drop figures to be temporary because many loans backed by the FHA have fallen into foreclosure, but banks have been slow in taking back homes after they were caught fabricating documents in order to quickly repossess homes.

Why does the idea of renting out homes have appeal?


Officials like the idea for three reasons. The first is that a backlog of foreclosures estimated in the millions could roll onto housing markets in the coming years. The New York Fed estimates that banks and mortgage companies could take back 1.8 million properties in each of the next two years, up from 1.1 million in 2011 and 600,000 in 2010.

Second, there are signs that home prices of traditional homes are stabilizing in some parts of the country, even as distressed sales drag down property values. The gap between prices of traditional home sales and distressed home sales has widened in recent months. For the year ending in November, home prices were down by 4.3% as measured by real-estate firm CoreLogic. But prices were down by 0.6% when distressed sales are excluded.

Third, this is attractive because rents in many parts of the country are beginning to rise.

What parts of the country could see these types of programs?

In a white paper released by the Federal Reserve last week, officials identified 60 metro areas where federal entities have at least 250 foreclosed properties for sale — a scale that could be large enough to justify a rental program. The largest concentrations of foreclosures held by these entities were in Atlanta, with 5,000 units, followed by Chicago, Detroit, Phoenix, Los Angeles, and Riverside, Calif., which each have between 2,000 and 3,000 units.

While not all of these properties are good candidates for conversion to rental, preliminary estimates from the Fed suggest that around two-fifths of Fannie’s foreclosed properties could generate yields of 8%, which could be enough to warrant renting rather than selling the property.

Why can’t the private sector do this on its own?

Certainly, private investors have been building up operations in the rent-and-hold arena, and it’s possible that these types of rental transactions could happen anyway without any government involvement.

But there are two main obstacles facing investors: financing and scale. Most foreclosure investing has been done by local investors. But these outfits have faced challenges getting financing to buy enough homes to scale up a viable rental model. Institutional investors, meanwhile, have deeper pockets but banks have largely resisted big bulk sales of homes, making it harder for them to assemble big pools of homes.

Will this program have any impact on home prices?

To do so, the program would need to be quite large, and that isn’t likely to happen for some time. Michelle Meyer, an economist at Bank of America, says the proposed programs run the risk of being too small to have much impact.

Economists at Goldman Sachs estimate that moving all foreclosed properties from the for-sale market to the rental market would increase home prices nationally by around 0.5% in the first year and 1% in the second year. Of course, no one is talking here about moving all properties from the for-sale market to the rental market, so this shows the maximum effect of such initiatives. The real effect figures to be far more modest.

Original Post: http://blogs.wsj.com/developments/2012/01/12/six-questions-on-foreclosure-to-rental-programs/

1 comment:

  1. Thanks for sharing your knowledge about foreclosure. I have also a case like this before and it is not easy to defend it. You much choose a great lawyer to win on this.

    Chicago Foreclosure Defense

    ReplyDelete