REO to Rental: Fannie Mae Dips Further Into Foreclosure Pool
The pilot program, first announced in August as an effort to clear the mortgage giant's backlog of foreclosures, is launching with an initial offering of 2,490 residential properties in some of the hardest-hit markets. The largest percentage of homes (23 percent) is located in Atlanta, with Los Angeles/Riverside and West Florida rounding out the top three. (View a breakdown of the properties below.)
Buyers can include corporations, investment trusts and even individuals, so long as they meet eligibility requirements and agree to rent the properties for a set number of years.
An Underwhelming Debut?
But after months of anticipation from REO investors and market analysts, some experts were unimpressed by the program's first offering.
An analysis of the available properties by analytics company Capital Economics found that 85 percent of the units are already occupied.
"Frankly, it doesn't really address what we hoped the REO scheme would address," Capital Economics analyst Paul Dales told AOL Real Estate. Namely, he said, their goal should be twofold -- to reduce the number of vacant homes on the market, which drive down home values, and to help lower the cost of renting by providing new rental units to the market. Neither of which is really tackled by the initial REO offering.
He does give the program the benefit of a doubt, though -- they may be trying to sell off the low-hanging fruit first. Selling properties with tenants already in them ensures a steady stream of income for the investor. Dales says that he suspects the strategy will shift toward moving more vacant properties, as soon as the program feels out its investor base.
Will Investors Bite?
Donna Robinson, an Atlanta-based REO specialist and consultant, doesn't think offering occupied properties is necessarily a bad thing -- it just leaves a lot of unanswered questions for investors.
"Most landlords aren't big, highfalutin investors," Robinson said, but those who do qualify for the program will have several questions about the quality of their inherited tenants, and the terms on the leases. And for those purchasing larger pools of properties, trying to standardize lease terms only becomes more involved as the distance between properties and the number of tenants grows.
The FHFA said it will make more details available -- presumably answering some of the above -- to prospective investors who pass through a "rigorous" qualification process and sign a confidentiality agreement.
What remains to be seen is the typical size of the foreclosure pools that the program hopes to unload on investors, and at what rate of discount. The nearly 2,500 properties released for sale in the initial offering represents only about 1 percent of all foreclosures owned by the government sponsored enterprises, which include Fannie Mae and Freddie Mac, according to Capital Economics. In August, there were nearly 250,000 foreclosures owned between Fannie Mae, Freddie Mac and the Federal Housing Administration.
Even under optimal conditions, an analysis of the program by Goldman Sachs suggested that the project would have "positive but modest" effects, with maybe a 0.5 percent increase in home values within the first year.
But if more buyers share the same zeal for the prospect of single-family investing as renowned investor Warren Buffet, the program could be off to a great start. Buffet recently told CNBC that he would buy up "a couple hundred thousand" single-family homes if it were practical, and for the right price, going so far as to say that houses are a better investment than stocks at the moment.
Whether or not his peers will pony up to clear the more-than-200,000 inventory of FHFA-managed home foreclosures remains to be seen, but the market waits for no one. The New York Federal Reserve Bank predicted another 3.6 million foreclosures nationwide over the next two years.
Breakdown of Properties in the Pilot Offering:
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