Government mulls going into rentals with some of its foreclosure properties

Source: Wall Street Journal

The Wall Street Journal's Nick Timiraos reports on an idea gaining traction on Capitol Hill that would see the government simply take some of its stock of foreclosed homes and rent them out at prevailing market rates rather than sell them for a song. Timiraos writes, "Critics worry about the risk of the government as landlord. One solution: sell federally backed foreclosures to investors who would have to agree to rent them out for a to-be-determined period of time. Investors would rehab the properties, fill them with tenants, and hire a national property management firm to oversee the day-to-day landlord needs. Supporters say while the government isn’t set up to be a landlord, neither is it any better prepared to sell thousands of foreclosed properties — something it’s already doing anyway."

There’s an 800-pound gorilla in the nation’s hardest-hit housing markets: hundreds of thousands of foreclosed properties are selling, and there’s four times as many potential foreclosures behind them.

The Journal writes today that one idea gaining support in Washington is an effort to pull some of those properties off the market and rent them out, either on homes owned by federal agencies or loan giants Fannie Mae and Freddie Mac.

These firms and U.S. banks currently own more than 500,000 foreclosed homes, and there’s another 2 million loans in some stage of foreclosure. The high share of distressed sales in many struggling markets is contributing to continued declines in home prices.

“Can we find a way to try and reduce that overhang or to try to provide incentives for investors to covert them?” said Federal Reserve Chairman Ben Bernanke in testimony to Congress last week.

Critics worry about the risk of the government as landlord. One solution: sell federally backed foreclosures to investors who would have to agree to rent them out for a to-be-determined period of time. Investors would rehab the properties, fill them with tenants, and hire a national property management firm to oversee the day-to-day landlord needs.

Supporters say while the government isn’t set up to be a landlord, neither is it any better prepared to sell thousands of foreclosed properties — something it’s already doing anyway. “Putting these homes in the hands of people who can take care of them and rent them out” would save taxpayer money, says John Burns, who runs a home-building consulting firm in Irvine, Calif.

So far, the Fannie and Freddie have disappointed institutional investors by resisting selling homes in bulk at deep discounts. Instead, foreclosures are either sold through regular retail listings or in public auctions, known as trustee or sheriff sales. Those auctions have attracted primarily mom-and-pop investors but also include hedge fund-backed debt buyers.

Two years ago, investors increasingly scooped up cheap properties at auctions in the hopes of rehabbing and quickly reselling them for a profit. But declining home values — and increased competition from investors — has made that much harder.

Meanwhile, the discounts for foreclosed properties in some markets are so attractive “that it looks like the cash flow investors are getting [on rentals] is awfully good,” says Thomas Lawler, an independent housing economist in Leesburg, Va.

One sign that investor demand has picked up for cheap properties that can be rented: in Phoenix, the number of homes selling below $100,000 was up 41% from one year ago in May, while all other sales were down 11.3%, according to DataQuick, a real-estate data firm.

“It doesn’t take too long as an investor to recognize the opportunity: home prices are less, but rents are more,” says Eric Peterson, a former homebuilder and co-founder of Praxis Capital, which has launched a $10 million fund focused on renting out foreclosures. Once prices stabilize and begin rising in a few years, “we’ll be holding a fair amount of inventory, and we’ll be ready to sell.”

The idea has won backing from a number of influential private sector minds. Rental programs could “solve a couple of policy problems with one solution” by also extending qualified tenants an option to one day purchase the homes, said mortgage-bond pioneer Lewis Ranieri in a recent paper with Kenneth Rosen, a housing economist at the University of California at Berkeley.

URL to original article: http://www.builderonline.com/builder-pulse/government-mulls-going-into-rentals-with-some-of-its-foreclosure-properties.aspx?cid=NWBD110725002

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