Would turning foreclosures into rentals help?

Analysts suggest an REO-to-rental program wouldn't do much to help home prices. It's also possible the government would have to offer subsidies to investors.

By Teresa at MSN Real Estate Jan 19, 2012 12:53PM

House for rent in the middle of winter (© David Joel/Getty Images)The federal government is reported to be close to a program to turn foreclosed homes owned by Fannie Mae, Freddie Mac and the Federal Housing Administration into rental properties, probably by selling them off in bulk to investors.

 

But, like many of the government's initiatives to combat the foreclosure crisis, this one may have significantly less impact than hoped.

 

An analysis by Goldman Sachs estimated that in the most optimistic scenario, such a program would boost housing prices 0.5% the first year and 1% the second year. But the impact would probably be less.

 

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Loren Berlin of the Huffington Post listed these three obstacles that Goldman Sachs analysts see to an REO-rental program's success:

  • Some of the properties would remain vacant, because no one would want to rent them.
  • Turning these REOs into rentals wouldn't cut the overall number of homes on the market because banks would replace those homes with their own inventory for sale.
  • As many as half of Fannie and Freddie's homes aren't suitable for rental.

The Wall Street Journal's "Developments" blog has a Q&A on how such a program might work. One option would be a type of equity sharing, in which the private firms would handle the rentals but Fannie, Freddie and FHA would keep some kind of stake.

One obvious question is, if these properties are good rental properties, why haven't investors bought them already?

 

Some, of course, have not been offered for sale. Investors who can afford to pay cash are scooping up properties they deem to be a good rentals in good locations.

Large investors have expressed interest in programs that would allow them to buy up foreclosed homes in bulk, with the idea being that they need a larger number of rentals to make putting together the rental apparatus worth the trouble. But they can't get loans for bulk buys, Shanthi Bharatwaj points out at The Street.

It's possible the investors would be offered favorable loan terms from Fannie and Freddie, which would facilitate home purchases. In other words, not only would big investors get a chance to buy up REO properties in bulk, they might get government help to do so. John Carney at CNBC's NetNet sees potential problems ahead:

To put it another way, in the name of supporting home prices, the Obama administration will likely put in place a system under which investors make private profits while the taxpayers subsidize the risk.

 What do you think? Would an REO-to-rentals program help the housing market?

 
57Comments
Jan 20, 2012 4:36AM
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In response to yawning Cat's commentary, an owner behind on his $250,000 mortgage and the bank is selling the house at $139,900.  That's the problem in a nutshell right there, overblown loans that banks and the industry are raping owners & prospective owners... and investors are only looking to buy to act as slumlords and continue raping people in need of good housing while providing sub par and under maintained homes for rentals.
Jan 20, 2012 4:33AM
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This gets worse and worse.  First the banking system manufactures this disaster by preying on the stupid.  Then gets paid for raping and pillaging in the aftermath.  Now, they are going to take these homes that they have stolen and let their 'buddies' buy them at special rates...whoa wait a minute...the average person can't get a loan or get their loan reorganized to keep their home...EXCUSE ME????!!!
Jan 20, 2012 4:21AM
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unrelated to article,

I have noticed many dating site posts on this blog and would encourage all readers to flag these posts to get them removed asap.  Maybe then they will get the hint.

Jan 20, 2012 4:10AM
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I am a property manager in Southern Georgia and HUD is already renting their houses out. We had several properties that went into foreclosure(they were investment properties)and HUD allowed the tenants to stay in the houses and pay rent directly to them. Meanwhile; the banks that held notes on any rentals that we had; offered up to $5000 for a tenant to move out within 3 weeks...of course, most tenants took the buyout. An owner is behind on his $250,000 mortgage; the bank takes the house because bank would not work with the owner to redo his loan; bank puts house up for sale at $139,900. Now, bank has put money into house to get it looking good to sell(paint and carpet and so forth); it would have made more sense to work with the owner and maybe redo his loan from a 30 year to a 40 year; so, his payments would be much more manageable and house would not be dumped on market. A lot of tenants(renters)coul​d purchase the properties that they rent if someone would give them the opportunity to do so! And, no; I do not think anyone needs another bail out. If our government had of given each US taxpayer in 2009....$25,000 each; we could have helped out our own. We would have been able to pay our mortgages; purchased cars and put money into the economy. Thank you!
Jan 20, 2012 3:50AM
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This is perhaps the worst idea to address the housing crisis I have heard.  I say perhaps because there might be a worse one but I cannot think what it might be.  Banks created this "crisis" and the taxpayers bailed them out (unwillingly -- the government made the choice for the taxpayers), yet, when a taxpayer faces a problem paying a mortgage the banks immediately choose foreclosure and fight any alternative that might help the taxpayer keep their home.  Instead of forcing the banks to be more creative in helping the taxpayer, the government comes up with a plan to encourage the banks to increase foreclosures so they can develop a revenue stream built on renting the properties they forced people out of.  Perhaps the banks should just start paying the politicians salaries directly and stop the no longer valid concept of politicians being representatives of the people.
Jan 20, 2012 3:42AM
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I know, why not package the loans in bulk too.  Sell them off and throw in some junk homes in the mix to get them off the books.  Sounds like we never learn

Jan 20, 2012 3:39AM
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If the government is so set on handing out money to jack up housing prices, then just give it to the people who are already paying too much rent.

Housing is still way overvalued from the last bubble.

To the Banks... Take the loss like the rest of us have, and move on.

Jan 20, 2012 3:33AM
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Well I don't think giving a subsidy to the banks or large investors as they want to call themselves will help.  Having invested in a couple of properties myself that I bought to turn around and rent.  I am at a standstill because I can't get a loan because my credit is in the dumps from the divorce.  But I have successfully repaired and rented these homes back out.  They don't care that those plans have worked out and I am managing this, they still are only looking at my credit rating number which doesn't say a whole lot about ME and my values, character and integrity.   I say the banks got themselves into their mess, we are STILL at their mercy and this would make it worse.  Why bundle these homes, they'll treat them like housing projects and those were a complete disaster. 
Jan 20, 2012 3:27AM
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The only people this would benefit would be the "Fat Cats" .  They can dress the program up and make it seem that this is a helping hand for the struggling American worker. At first it will seem like a great deal for everyone but in reality only the banks, realtors and other investors will gain. The regulations will appear to protect the average American but the "fine print" will protect only the owners and not the renters. Prices may be low at first but they'll require the renter to purchase expensive insurances, maintenance agreements and absorb other costs such as tax increases over time. That's Capitalism at its best. Who Wins!!!!!! You guessed it.........."THE FAT CATS"!!!!!!!!!!!!!!!!
Jan 20, 2012 2:57AM
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First off, I don't believe there's any need for the taxpayer to subsidize the risk for the investors. It sounds like we're (the taxpayers) bailing out Wall Street again!!! If there is true value in this potential investment, it will outweigh the risk and attract the needed investors without subsidies. If you must guaranty profits for investors, there should be equal opportunity for the small investors and not just the big Wall Street investment firms.
Jan 20, 2012 2:57AM
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More fat cats raping the public for places to live.... Mostly youth. No wonder youth are telling ya all to go to hell. How about building homes people can afford. IE CHEAP. You know, without having to fund the lavash lifestyles of millionaires.

Jan 20, 2012 2:05AM
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Trying to get a bank to sell a home with a short sale or even sell a REO is like pulling teeth.  Most people don't want to wait three months to find out if the bank will acept their offer.

Jan 20, 2012 1:44AM
Jan 20, 2012 12:41AM
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The reality is that there are too many homes already foreclosing with a massive bulge of foreclosing homes coming through the system.  Foreclosures and short sales were what, 42% of home sales in the US last year?

 

Every time you foreclose you put downward pressure on the value of the collateral for the rest of your mortgages, pushing more of them under water.   With this volume it is self defeating.

 

Renting most of the homes that would be foreclosed is the only option that makes any economic sense. 

 

Take the Goldman Sachs propaganda (probably published because they have a short position in real estate).   They say, if Fannie May and Freddie Mac take more homes off the market, the banks will just compensate by putting more homes on the market.

 

That ignores the systemic effect of sales.  If the banks would be keeping those homes off the market to avoid depressing prices, then the banks would either be renting the properties or taking a hit.

 

There will be a range in supply where the price will remain about the same.  Go above that amount and prices will go down, whether the sales are by Fannie Mae or Bank of America.  Doesn't matter. 

 

The real difficulty which has been inadvertently raised by Goldman Sachs is, how do you get other organizations to play ball and not screw up what everybody else is trying to do by mindlessly selling every foreclosed property.

 

That is something to think about, although I think there should be a target of depressing home prices say 5% per year until they start making sense again. The cost of putting roofs over heads is sucking the life out of the economy.

 

I would say, pick a target for total foreclosures and have some way to enforce it.  Have say the first 100 foreclosures for an institution allowed with no additional cost so you don't shaft small investors that have a mortgage over someone else's property and small institutions, and make the larger financial institutions bid for the right to have a foreclosure sale for more.  Or cap them at 1 or 2 or some other percentage of their total mortgages in foreclosure sales. 

 

 

Jan 19, 2012 11:49PM
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The federal government is reported to be close to a program to turn foreclosed homes owned by Fannie Mae, Freddie Mac and the Federal Housing Administration into rental properties, probably by selling them off in bulk to investors.

 

Anything goobermint has a hand in scares the be jeepers out of me with more than enough proof in previous debacles to show it's incompetence and corruption. Taxpayers about to take another hit of  more debt and waste?  Unfortunately, a  high probability as Congress and the Administration are about  to start financial suicide mission for us but not for investors. Oh well, it's only tax dollars.

 

How much more are we going to spend bailing out Fannie and Freddie along with the banks by buying their toxic mortgages? Maybe just a  hundred million tax dollars to to fix up these battered and abused foreclosures into livable and rentals for sale to investors.

 

May as well go all the way since our debt is on par with light years of measurement.

Jan 19, 2012 11:43PM
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Really MSM? Banks create a housing bubble,bubble bursts people loose homes ,banks get bailed out and buy homes with peoples own money,then rent them back to people....and you can say this is a good idea? this is a damn shame! people are getting screwed and all mainstream media is doing is fluffing.....BOOOO!
Jan 19, 2012 11:27PM
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Sounds like a way to help the biggest banks out once again with a problem they created 
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