The Obama administration, in conjunction with federal regulators and led by the overseer of Fannie Mae and Freddie Mac, according to industry reports, is very close to announcing a pilot program to sell government-owned foreclosures in bulk to investors as rentals.

The Scope of the Problem: There currently are about250,000+ foreclosed properties on the books of Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA), and millions more are coming. In fact, late-stage delinquencies still in the pipeline number close to two million. Foreclosure starts outnumber foreclosure sales by two to one and “the trend toward fewer loans becoming delinquent, which dominated 2010 and the first quarter of 2011, appears to have halted.”

The Genesis of the Plan: As the Federal Reserve alluded to in its white paper on housing last week, “A government-facilitated REO-to-rental program has the potential to help the housing market and improve loss recoveries on reo portfolios.” REO’s (Real Estate Owned) are bank-owned properties, or, in this case, properties owned by the government-sponsored enterprises and the FHA. Three Fed governors pushed for similar plans in speeches last week, as well.

Test Away: A pilot sales program will be starting in the very near future. They are working on what the market potential is, what pricing would be, how government can partner with private investors, and who has the operational experience to manage so many properties.

A number of institutional investors have shown appetite and interest in bulk REO deals, but the plan has to incorporate ways to help facilitate financing. That has been one of the biggest roadblocks to deals already in the works between hedge funds and the major banks. 

Sources close to these private bank negotiations say there is plenty of cash to buy properties, but building out a management structure for the rentals is pricey, and some investors are finding the math doesn’t add up to make it worth their while. 

Larger investors want to be able to get real scale in any government program, in the range of 50, 100, 500 properties per deal, or $1 billion-plus in assets.

Several pilots are expected that will involve both local investors and institutional investors. The goal here is to reduce supply by converting foreclosed homes into rental units. Less supply — even less fear about a flood of foreclosed homes hitting the market — could stabilize [home] prices.”

While much of this program will focus on local areas of distress, officials say they are looking at where the assets are today but are really more focused on where all the foreclosures will be in the future. It’s not about the stock of foreclosures currently; it’s about the flow of them over time and alternative ways to manage that flow.

Officials say they want to bring back private capital and help support rental opportunities for households, particularly when rent rates are up at the same time home prices are down.

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