Federal Reserve Floats REO to Rental Idea

Federal Reserve Idea Would Bundle Foreclosed Homes and Sell Them to Investors as Rentals

In a wide-ranging document that outlined the illnesses in the US home lending market, the Federal Reserve last week offered four ideas that, if implemented, would rid the market of the glut of real estate owned (REO) properties, remove incentives for mortgage servicers to foreclose instead of short sale properties, help distressed homeowners by reducing principal on their loans, and loosen overly tightened lending standards.

The so-called "REO to rental" idea generated the most interest in the media. This article outlines its basics. But first a disclaimer: The Fed's The U.S. Housing Market: Current Conditions and Policy Considerations document was just what its title suggests. What the Fed proposed in its Jan. 4, 2012 document is an idea for Congress and President Obama to consider, and is not a law or rule. Some mortgage servicers may create REO-to-rental plans on their own initiative, and others may ignore the Fed's report completely. Bills.com will update this page if Congress or Obama act on the REO to rental idea, or if mortgage servicers create their own plans.

REO to Rental at a Glance

The Fed reports that REO properties made up 25% of all of the 2 million vacant homes in Q2 of 2011. Frighteningly, the number of properties in the early stages of foreclosure is four times the number of REO properties on the market. The Fed expects a 1 million new REOs in both 2012 and 2013, which will continue to push home prices lower. Because of the number of families being pushed from their homes or otherwise do not qualify for mortgages, the rental market has heated up.

The Fed proposes the Federal Housing Finance Agency (FHFA) and private REO holders to bundle groups it call "bulk pools" of nearby REO properties and sell them in bulk. This would reduce the per-unit cost of sale, and give the buyer the opportunity to manage the rental management of these units efficiently.

The Fed suggests that some of the buyers of bulk pool REO property could be managed by local non-profits, or local banks. Banks and the FHFA, by rule, are not allowed to rent REO properties. The Fed also entertained the idea of local banks renting their REO properties themselves, or Congress creating incentives for rent-to-own contracts with renters.

Reaction to REO to Rental

Fitch Ratings, a rating company and publisher, found merit in the Fed's REO to rental idea. In particular, it will "limit the growth of the inventory of foreclosed homes, make mortgage credit easier to access, and limit the flow of homes into foreclosure."

Goldman Sachs analysts, by contrast, were not as optimistic. It opined that it would not reduce the number of homes for sale, because properties that are presently not on the market because of low prices would enter the market. In other words, there is simply too much supply in the market due to four years of stagnant sales.