REO-to-Rental Program Takes Next Step: FHFA

A government-sponsored REO-to-Rental program that aims to soften the blow of foreclosed homes to the housing market has entered a new stage.

The Federal Housing Finance Agency, which controls Fannie Mae and Freddie Mac, recently announced that it has selected the winning bidders of a preliminary program that will allow investors to purchase homes in hard-hit areas around the country that are currently owned by the two mortgage giants, and then rent them out.

The announcement of the new phase of the project renews focus on an innovative investment opportunity being embraced by a wide cross-section of players in the real estate market: Snapping up bank-owned homes and restoring and selling them or converting them into rentals.

Government bodies and non-profits are reclaiming REO -- which stands for "real estate owned" and refers to bank-owned properties -- to revitalize hard-hit neighborhoods, while lenders and private investors are focusing their attention on REO for monetary purposes.

It's a way to stall the damage foreclosed homes do to communities, mostly by dragging down the values of neighboring homes by one percent, said Douglas Robinson, a spokesperson for NeighborWorks America. If a neighborhood has multiple distressed properties, which can attract all manner of blight, then "you're talking about serious hits" to neighborhoods, Robinson added.

Foreclosed homes often sell for more than a 25 percent discount, compared to non-distressed properties. As foreclosures have continually flowed onto the market, they have pushed down home prices and drawn out the housing crisis.

According to analytics firm CoreLogic, 2.8 million properties are seriously delinquent, in foreclosure or bank-owned, so the flow of foreclosed homes onto the market -- even amid ramped-up efforts to stave it off -- isn't going to go away anytime soon.

Because of that, federal and state governments have been eyeing programs that may chip away at the glut of foreclosed homes. The FHFA is currently test-driving REO-to-rental programs by nudging Fannie Mae and Freddie Mac to sell 2,500 foreclosed homes in bulk to investors.

New Jersey recently tried to wade into the REO-to-rental world with a bill that would have created an agency to buy and convert bank-owned homes into rentals or affordable housing. However, it was vetoed by New Jersey Gov. Chris Christie.

Investors have already been in the REO game for some time, snapping up properties left and right and renting them out as they wait for home prices to climb high enough to sell. Robinson said that home sales by investors account for 25 percent of total home sales.

Lenders are also seeking to reduce their REO portfolios by testing related programs. Bank of America launched its "Mortgage to Lease" program in May, which allows a homeowner facing foreclosure to hand over his home's title to the bank in exchange for the right to rent it.

In addition, non-profits are also helping to shave off the supply of bank-owned homes. Drawing from the $7 billion Neighborhood Stabilization Program fund, NeighborWorks America affiliates across the country helped homeowners rehabilitate more than 8,700 homes and 43,000 rental homes in 2011. Recently, they teamed up with the nonprofit Rebuilding Together to train the groups to rehabilitate vacant foreclosed homes and sell them to low-income Americans across the country.