The Federal Housing Finance Agency (FHFA) has announced that investors interested in its Real-Estate Owned (REO) Initiative may “pre-qualify” to establish eligibility to bid on transactions in the initial pilot phase as well as subsequent phases.

This is a first step toward implementing the initiative, which was announced in August 2011.

The REO Initiative will allow qualified investors to purchase pools of foreclosed properties with the requirement to rent the purchased properties for a specified number of years. This rental period could provide relief for local housing markets that continue to be depressed by the volume of foreclosed properties, and provide additional rental options to certain markets.

The FHFA said in a release that pre-qualification ensures investors will have the financial capacity and operational expertise to manage properties in a way that is conducive to the stabilization of communities hard hit by the housing downturn.

“This is an important step toward increasing private investment in foreclosed properties to maximize value and stabilize communities,” said FHFA Acting Director Edward J. DeMarco in an FHFA press statement today. “I am grateful for the collaborative effort by the many stakeholders including investors, nonprofit organizations, and state and local government officials, who have worked together on this Initiative.”

During the pilot phase, Fannie Mae will offer for sale pools of various types of assets including rental properties, vacant properties and nonperforming loans with a focus on the hardest-hit areas. The first transaction will be announced in the near-term, stated the FHFA press statement.

The purpose of the pilot phase will be to examine investor interest in various types of assets, including the location, size, and composition of pools of assets; the ways in which investors maximize the participation of experienced local firms and organizations that can provide the types of services and support needed to ensure community stabilization; the types of structures and/or financing that improve returns to the sellers as well as home values in impacted markets; and the process by which investors are qualified to and ultimately participate in the sales transactions.

The program garnered lots of attention at the American Securitization Forum's conference last month in Las Vegas and has been likened to the Public-Private Investment Program for Legacy Assets or the Term Asset-Backed Securities Loan Facility (TALF), in which the government partnered with private investors when needed.

"The government can encourage private investors through higher yield targets by providing attractive long-term financing," explained Credit Suisse analysts in a research report.

However, Barclays Capital analysts said that the REO-to-rent program while beneficial for home prices, wouldn't garner the yield levels that would peak securitization investor interest.

"Rental yields (adjusted for vacancies/future vacancies) are much lower than where bond yields in the non-agency space were when the PPIP was announced," analysts said in a report this week. "As a result, the equity yields on such a program would look less attractive."

The analysts also noted that the logistics of managing hundreds or even tens of properties would require locally situated property management firms. "As a result, this remains difficult to scale effectively and may not draw as much money as envisioned," Barclays analysts said, adding that the program might be more effective in specific regions with higher rental yields.

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