With home sales anemic and an anticipated avalanche of foreclosures looming, policymakers are beginning to view renting troubled properties as a way to soak up inventory and put a floor on the housing market. And investors are starting to take note.
Institutional investors – none of which have been identified by name, though chances are private equity money would be involved – want to purchase seriously delinquent loans in bulk from the GSEs and lease back the properties to former homeowners at market rents. They also see a chance to create the first single-family housing REIT, which could attract even more institutional investors to the model.
With up to 5 million foreclosures anticipated over the next 18 to 36 months, the Obama administration is exploring the notion of renting as a way to stabilize housing markets and communities.
Renting provides cash flow to maintain the properties and pay real estate taxes to counties. In addition, the tenants can find a rental for three to five years, repair their credit record, and possibly buy the home down the road.
Four members of the House Financial Services Committee introduced a bipartisan bill last week that encourages banks and the GSEs to rent foreclosed properties. The neighborhood stabilization bill (H.R. 2636) authorizes these federally chartered institutions to lease REO to renters for up to five years. (The leases can include an option to buy.) It also opens the door for federal institutions to engage in "lease-back deals with homeowners not in foreclosure," according to Federal Financial Analytics, a Washington consulting firm.
Such an approach allows seriously delinquent borrowers to remain in their homes if they agree to pay rent and sign over the deed to the bank or GSE.
A deed-for-lease transaction creates a technical foreclosure. In terms of the accounting treatment, the GSEs and banks would take less of a hit than on a REO sale. In dollar terms, it is estimated the holder of the note would lose 30% more on an REO sale than doing a deed for lease.
Reps. Gary Miller, R-Calif., Spencer Bachus, R-Ala., Barney Frank, D-Mass., and Carolyn McCarthy, D-N.Y., are sponsoring the neighborhood stabilization bill.
"It is good to see Congress is thinking along these lines," said Anne Canfield, a Washington financial consultant. "But it is not as comprehensive as some proposals that are being discussed with some institutional investors." (Canfield declined to name the investors.) Investors are willing to make a substantial investment to purchase seriously delinquent loans from Fannie and Freddie and lease back the properties to the former homeowners. They would presumably hold the properties for a minimum of three years and give the former owner the first right of refusal when they list the property for sale, she said.
Private-money firms, she added, would be willing to fund a nationwide rental company, which is needed to manage and maintain the single-family rental properties. "No federal money is needed nor has any been requested," Canfield said.
But to get the DFL program off the ground, they need inventory – and the GSEs have plenty of that. As of March 31, Freddie Mac controlled $82 billion of seriously delinquent loans (90 days or more past due) with Fannie Mae holding almost double that amount, $147 billion. (Institutional investors would also like to discuss a joint venture with the GSEs.)
To test their theories, some of investors have started a pilot program in Phoenix where they are purchasing properties on the courthouse steps and approaching the former owners with an option to rent. "It has been a very successful program," Canfield said.
Meanwhile, individuals and small PE groups are relying mostly on cash to purchase distressed single-family properties and turn them into rentals.
They see a market where rents are rising, multifamily vacancy rates are falling and more foreclosures are in the pipeline.
"Rental yields are high enough to entice some amount of private capital, but financing for investor properties would certainly attract more capital and cushion further home price declines," according to Amherst Securities Group (ASG).
ASG believes investors are the "key" to increasing demand for housing and absorbing the excess supply of units.
But a lot of investors can¹t reach the scale needed to hire a full-time property manager and maintenance personnel since Fannie limits its investor financing to 10 properties, Freddie to four properties and FHA doesn¹t make any loans to investors.