Government seeks ideas on renting out foreclosures

The government is floating the idea of involving the private sector in rehabilitating and then renting foreclosed properties. The request for ideas was issued to get input on possible partnership ventures or other strategies that would help to unload approximately 250,000 properties owned by Fannie MaeFreddie Mac and the Federal Housing Administration. Those properties account for about half of all properties that have been foreclosed on and are still awaiting resale nationwide. No doubt many more are in the pipeline, yet to come. But will it work?

As we wrote earlier this week, foreclosures can quickly destabilize a neighborhood, lowering home values on nearby properties, lead to more crime, and reduce tax revenue for municipal governments. The impact on families of losing a home is even more devastating, uprooting children from schools and destroying a family’s access to credit, among other things.

Therefore, the government’s idea is to pool properties together and encourage investors to buy them and rent them out. As the press release put it:

“A specific goal is to solicit ideas from market participants that would maximize the economic value that may arise from pooling the single-family REO properties in specified geographic areas.  Under the management of a third-party, a joint venture or some other structure may respond to local economic and real estate conditions more effectively than individual sales.  For instance, there may be certain metropolitan areas (or some narrower geographic designation) with a substantial number of REO properties and a strong rental market.  In such locales economic value in REO disposition may be enhanced (and real estate markets begin to be stabilized) by turning a large number of REO properties into rental housing…”

This, the thinking goes, would help to stabilize neighborhoods and perhaps build up a stock of affordable housing in the process. It would also help to rid the government of these difficult-to-move properties, which have been a drag on the housing sector.

Affordable housing is imperative. A recent report by the Urban Institute notes that nearly half of renters pay more than 30% of their income to housing, which is considered financially burdensome by most economists. The share of renters shouldering this burden rose steadily between 2001 and 2009 as the housing bubble inflated. At the same time, more than one-fourth of renters pay more than 50% of their income to housing. Furthermore, the report notes, by 2009, there were only 64 affordable, available, and adequate rental units for every 100 very low-income renter households.

Therefore, a plan to get the business community involved to repair vacant homes and put them back on the market on its face seems like a good idea.

But will it work?

John K. Mcllwain at the Urban Land Institute is skeptical. In a recent column in “Urban Land,” he said that to reduce losses for the government and taxpayers—which appears to be the main objective of the suggested approach—the rents would most likely be too high for many families. It costs money, after all, to make repairs and get the houses back into livable conditions. Many homes have been stripped of appliances and have been empty for many months.

“It is also expensive,” he says, “to properly manage a large portfolio of homes, most of which are likely to be spread over a wide area. Keeping the grass cut, pools cleaned, trash picked up; repairing toilets and refrigerators when tenants call to complain; and failing to collect rents from deadbeats can quickly wipe out any profits.”

All this will require higher rents than “affordable” units can charge. And as he notes, while the market for rentals has been strong, “But where many of these homes are located (on the outer edges of metropolitan regions far from jobs and services or in depressed inner-city neighborhoods) frequently are not where rental markets are thriving.”

Nevertheless, it can be hoped that at least some of the inventory will find its way into the supply of affordable rental and for-sale housing.

Mcllwain also notes that the government’s interest in some sort of public-private venture to move these foreclosed properties, coupled with smaller investors who have been buying foreclosed homes to rent and resell, might signal a fundamental shift in suburban life. They may soon be home to many more renters.  As we noted in the post earlier this week, the suburbs are not immune to the housing crisis, and in fact have the fewest resources to respond. Unlike inner cities with a history of organizations working to stabilize neighborhoods, the suburbs have little such history.

“Several major homebuilders,” Mcllwain says, “are beginning to rent portfolios of homes as a new business line. This adds to the group of mostly smaller investors who have been buying homes at foreclosure sales to hold, rent, and then resell. If the federal government joins in this business, American suburbs soon will see a growing presence of rented single-family homes, a presence that is likely to grow anyway as the national homeownership rate declines. The nature of the suburbs may well be in the process of a fundamental shift and becoming no longer the sole province of the homeowner. And the implications of such a shift, if it does occur, likely will be quite far reaching.”

More on this story at the New York Times as well.

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