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Tuesday, January 24, 2012

Government Foreclosure to Rental Plan Being Worked On

The White House is close to announcing a pilot program to sell government-owned foreclosures in bulk to investors as rentals.  

The Federal Reserve, Treasury, HUD, Fannie Mae and Freddie Mac are working out details of the plan, including what the pricing for such a sale would be, the government's role in the plan and identifying those with the operational experience to manage such properties, according to the report.  

The policy aims at reducing the foreclosure supply in the market.

Banks repossessed fewer homes in 2011, but much of the slowdown was because of foreclosure processing delays. The recent spike in "default filings" points to a fresh wave in foreclosures in 2012, which could hold prices down further. The number of properties in the foreclosure pipeline is more than four times the number of REO -- or real estate owned properties -- for which foreclosure processing has been completed, according to the Fed.

Families who have lost their homes to foreclosure also tend to move to single-family rentals, so a proposal to convert foreclosures to rentals will also make sense.

Investors have been snapping up foreclosed properties at bargain prices and converting them into rental units, but large-scale conversions have not taken place.

For one, investors are willing to buy bulk properties only at significant large discounts, partly because they are unable to get debt financing for such transactions. Mortgages are available for individual one-to-four family homes and multi-family units but not for a portfolio of single-family homes.

Bank Owners of foreclosed properties worry that selling in bulk will affect their recoveries.  
The Fed expects that providing investors with some sort of debt financing will improve the prices investors are willing to offer for the bulk properties and is debating whether such financing should be subsidized.
Banks are generally not allowed to engage in real estate property ownership or management and guidelines call for disposal of properties as soon as possible.

Still, recognizing the realities of the current market, banks have been allowed to rent properties directly or through third party vendors so long as they show good -faith efforts to sell the property. 

Finally, as the Fed itself acknowledges, not all foreclosed homes are suitable for rent because of their condition, their location or because rental cash flow might not provide adequate compensation for the cost of the property.

Still, compared to a tax credit, which has only a temporary impact, an REO-to-rental program might have a more "lasting effect" and could alleviate concerns about the effect of "shadow inventory" on the housing market over the next couple of years, the analysts said.

Could be helpful.... Or not.... depending on the buffoons implementing this..... IMHO

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