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.
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?
| Tags: | foreclosuresrentals |
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.
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.
About Teresa Mears
Teresa Mears is a veteran journalist who has been interested in houses since her father took her to tax auctions to carry the cash at age 10. A former editor of The Miami Herald's Home & Design section, she lives in South Florida where, in addition to writing about real estate, she publishes Miami on the Cheap to help her neighbors adjust to the loss of 60% of their property value.
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