Turning foreclosed properties into rentals on a mass scale will reduce "some of the fears that an avalanche of distressed properties" will rattle the housing market, according to a new report from Wells Fargo Securities (WFS).

The recent state attorneys general settlement with the five mega-servicers is expected to unlock millions of homes tied up in the foreclosure process, flooding the market with new listings, and further depressing prices.

"These fears are keeping appraisals unusually conservative and mortgage underwriting standards unusually tight, discouraging home buying and keeping many would-be-sellers on the sidelines," Wells economists write in their report.

The firm expects that the government's plan to sell REO in bulk to investors who must maintain the properties as rentals will not only prevent an avalanche, but provide a better read on the so-called "shadow inventory" of distressed properties, its condition and location.

The bulk sales of Fannie Mae, Freddie Mac and Federal Housing Administration REO will provide "market participants with more information about how many of these troubled properties exist and where they are – once again helping to normalize appraisals and mortgage approvals," the WFS economics group said.

The Federal Housing Finance Agency recently placed the first bulk sale of 2,490 REO properties on the market. Investors must be pre-qualified to bid on the Fannie properties, which are grouped into eight markets. Credit Suisse is serving as Fannie's investment banker on the deal.

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