Foreclosure-to-Rental Program Great in Theory, Tough in Practice
What seems like a no-brainer — turning the hundreds of thousands of vacant, foreclosed homes controlled by the federal government into rental units — is going to be tough to accomplish.
The logic behind the idea is compelling. Across the country today, the federal government controls around 250,000 foreclosed homes, through Fannie Mae, Freddie Mac, and the Federal Housing Administration. More than a million more are in the foreclosure pipeline, with homeowners having fallen well behind on their mortgage payments.
Vacant homes deteriorate quickly. And the government is selling these homes individually at what some consider fire-sale prices, often to cash-paying investors, because it is hard to get financing to buy them.
At the same time, rental housing is becoming scarcer. The nationwide rental vacancy rate is currently 9.2%, its lowest level since 2002.
"You have people thrown out of their homes who are now finding it very difficult to afford to rent a modest place just to put their family," Sen. Jack Reed, D-R.I., said in a recent speech.
So the Obama administration is looking for a way to turn the real estate-owned homes, or REOs, that it controls into rental housing.
"I would argue that this approach can create value if done carefully and diligently, not just minimizing losses," said Reed, a longtime champion of the idea. "The other way to look at it is: if five years from now, nothing's done, those houses are going to be, you know, it's a ghost town. The pipes will be gone. The roofs will be broken. The lawns won't be cut. And then try to sell them."
But while there is broad agreement that a rental strategy makes sense, it faces enormous operational obstacles, including disagreement over the appropriate policy goals and questions about how to account for the local nature of real estate across the United States.
It now falls to the Federal Housing Finance Agency, which oversees Fannie and Freddie, to build a rental program that can make a real dent in the foreclosure inventory.
But several large challenges remain including: Specifying the program's goals.
Last month, FHFA asked housing market participants, community groups and others to provide suggestions on how the government might facilitate the sale of the REOs it currently controls in ways that are less costly to taxpayers than its current retail sales strategy, and also help to stabilize neighborhoods and home values.
The agency made clear that these are its primary goals and that its strategy for selling off foreclosed properties will not always involve turning it into rental housing. For some homes, demolition may be a possibility.
Meg Burns, who heads the housing and regulatory policy team at FHFA, said during an appearance last week that she estimates that fewer than half of the government-controlled homes in foreclosure will end up as rental properties.
"I believe that right now our expectation is that it will not be the majority, that the dynamics in enough markets nationwide are such that moving a large number of these properties into a rental arrangement will be difficult and maybe won't make sense from a financial perspective," Burns said.
But the FHFA will have to decide whether to pursue other goals as well.
The logic behind the idea is compelling. Across the country today, the federal government controls around 250,000 foreclosed homes, through Fannie Mae, Freddie Mac, and the Federal Housing Administration. More than a million more are in the foreclosure pipeline, with homeowners having fallen well behind on their mortgage payments.
Vacant homes deteriorate quickly. And the government is selling these homes individually at what some consider fire-sale prices, often to cash-paying investors, because it is hard to get financing to buy them.
At the same time, rental housing is becoming scarcer. The nationwide rental vacancy rate is currently 9.2%, its lowest level since 2002.
"You have people thrown out of their homes who are now finding it very difficult to afford to rent a modest place just to put their family," Sen. Jack Reed, D-R.I., said in a recent speech.
So the Obama administration is looking for a way to turn the real estate-owned homes, or REOs, that it controls into rental housing.
"I would argue that this approach can create value if done carefully and diligently, not just minimizing losses," said Reed, a longtime champion of the idea. "The other way to look at it is: if five years from now, nothing's done, those houses are going to be, you know, it's a ghost town. The pipes will be gone. The roofs will be broken. The lawns won't be cut. And then try to sell them."
But while there is broad agreement that a rental strategy makes sense, it faces enormous operational obstacles, including disagreement over the appropriate policy goals and questions about how to account for the local nature of real estate across the United States.
It now falls to the Federal Housing Finance Agency, which oversees Fannie and Freddie, to build a rental program that can make a real dent in the foreclosure inventory.
But several large challenges remain including: Specifying the program's goals.
Last month, FHFA asked housing market participants, community groups and others to provide suggestions on how the government might facilitate the sale of the REOs it currently controls in ways that are less costly to taxpayers than its current retail sales strategy, and also help to stabilize neighborhoods and home values.
The agency made clear that these are its primary goals and that its strategy for selling off foreclosed properties will not always involve turning it into rental housing. For some homes, demolition may be a possibility.
Meg Burns, who heads the housing and regulatory policy team at FHFA, said during an appearance last week that she estimates that fewer than half of the government-controlled homes in foreclosure will end up as rental properties.
"I believe that right now our expectation is that it will not be the majority, that the dynamics in enough markets nationwide are such that moving a large number of these properties into a rental arrangement will be difficult and maybe won't make sense from a financial perspective," Burns said.
But the FHFA will have to decide whether to pursue other goals as well.
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