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Transforming Foreclosures to Rentals

Written By:
January 12, 2012 at 12:31 PM

The government’s plan to reduce the number of abandoned, foreclosed homes in neighborhoods across the country may provide positive gains for the housing market.

In an effort to get the housing market back on track the Federal Housing Finance Agency, the Treasury Department and the U.S. Department of Housing and Urban Development are behind a strategy to sell government-owned (Fannie Mae and/or Freddie Mac backed properties) foreclosures in bulk to investors with the goal of transforming the properties into rentals.

Until now foreclosed properties were sold individually because investors wanted wider discounts in order to purchase properties in bulk.

The Fed-backed strategy is detailed in a white paper released last week, which stated, "Reducing some of the barriers to converting foreclosed properties to rental units will help redeploy the existing stock of houses in a more efficient way. Such conversions might also increase lenders' eventual recoveries on foreclosed and surrendered properties."

Plan details have not yet been formally announced, but officials have said it is, "proceeding prudently but with a sense of urgency to lay the groundwork for the development of good initial transactions in early 2012."

Reduce Foreclosures to Heal the Market

Federal Reserve Chairman Ben Bernanke said that this new strategy was a “big picture” way to address the housing crisis. "Restoring the health of the housing market is a necessary part of a broader strategy for economic recovery.”

Economics experts also understand how this strategy could be beneficial. Jaret Seiberg of Guggenheim Securities said, "The Federal Reserve is signaling in even stronger terms the need for the government to do more to help housing," he said. “The goal here is to reduce supply by converting foreclosed homes into rental units. Less supply – even less fear about a flood of foreclosed homes hitting the market – could stabilize [home] prices.”

The industry has been bracing for an onslaught of foreclosures this year after regulators temporarily disrupted the pipeline when they discovered that faulty foreclosure practices were being implemented by some lenders.

According to Lender Processing Services approximately two million homes are in the last stages of delinquency. Once they move into the foreclosure pipeline, home values will plummet, causing more turbulence for the housing market.

Instead of allowing the foreclosure pipeline to flood, the strategy reduces the number of vacant homes and provides opportunities to restore the property for productive use. The plan should stabilize neighborhoods and home values, while boosting the supply of rentals, which has experienced steady demand.

Although the bulk of the program will target areas that have been hardest hit by the housing crisis, program officials say that they will also be looking at areas where foreclosures may develop over time.

Adding More Rentals May Fill a Need

In Florida, one of the hardest hit areas, the demand for single family home rentals is on the rise.

Ingo Winzer, president and founder of Local Market Monitor said in a statement, "We think Florida is one of most interesting states in terms of rental property opportunities. That's because home prices haven't bottomed out, and rents will eventually be supported by renewed population growth."

Other housing research experts agree. David Hicks from Dallas-based research firm, HomeVestors believes that the Florida market provides some of the best opportunities for single family rental investors in 30 years.

"People who have been displaced from the housing market want to find a home — they don't want to go back to apartments," he said.

In New York, New York Federal Reserve President and CEO William Dudley said that choosing the right policies may help to stimulate housing demand, which can actually generate a heartier economic recovery. “There's a lot of friction in the housing sector and there's a lot of real-estate owned (REO properties) actually sitting vacant," he said. "A more efficient outcome would be to get (foreclosures) out and rented up."

Georgia Realtor, Mills Herndon said that while he’s seen improvements in his area, he knows the market still has a long way to go. “There's still a lot of foreclosures and short sales that are going to come forward this year so there's a lot of that inventory that we'll have to push out of the market."

He believes that less than 5% of the foreclosures in his area are owned by Fannie Mae. "If they turn those into rental houses, there is a rental market. I mean they will get rented and we have a big demand now for rent. For rentable properties."





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