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Fed Identifies Markets Primed for Bulk REO-to-Rental Programs

Posted January 10, 2012

The Federal Reserve is throwing its support behind a large-scale REO-to-rental program to address the oversupply of vacant foreclosed homes and prevent property values from falling further.  In a white paper distributed to key lawmakers on the House and Senate banking committees, the Fed notes that in contrast to the market for owner-occupied homes, the market for rental housing is strengthening. Because the housing crisis has forced millions of Americans out of their homes, made many others wary of purchasing a home, and constricted credit availability, Fed officials contend there is a long-term need for an expanded stock of rental housing.

“The decline in house prices and the rise in rents suggest that it might be appropriate in some cases to redeploy foreclosed homes as rental properties,” according to the Federal Reserve. The central bank says a government-facilitated program, in particular, has the potential to not only help the housing market but improve loss recoveries on REO portfolios for Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA). Fed officials point out that one reason large-scale conversions of REOs to rentals have not occurred is because it can be difficult for an investor to assemble enough geographically proximate properties to achieve efficiencies of scale with regard to the fixed costs of a rental program.

Fannie Mae, Freddie Mac, and FHA together hold about half of the outstanding REO inventory, and Fed officials have identified specific markets with large concentrations of government-owned REOs, where bulk sales to investors make sense. There are about 60 metropolitan areas that each has at least 250 REO properties currently for sale by the GSEs and FHA. Atlanta has the largest concentration with about 5,000 units. The next-largest inventories are inChicago;Detroit;Phoenix;Riverside,California; andLos   Angeles, each with between 2,000 and 3,000 government-owned REOs for sale. The Fed’s whitepaper also points out that the number of properties currently in the foreclosure process is more than four times larger than the number of properties in REO inventory, with similar geographic distribution. If recent trends continue, the share of REO inventory held by the GSEs and FHA should increase, according to Fed officials.

The Federal Housing Finance Agency (FHFA) released a request for information in August of last year to solicit ideas from market participants on ways to effectively sell off pools of properties to investors who will employ an REO-to-rental strategy. The agency is currently reviewing more than 4,000 responses. An interagency group in which the Federal Reserve is participating is considering issues related to the design of a program that would facilitate REO-to-rental conversions. The Fed’s 26-page whitepaper addresses a host of other issues that could potentially hinder such a program, as well as other facets of today’s housing market that are holding back a recovery.

By: Carrie Bay

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