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REO rental program to capture 20% of foreclosure pipeline

The Federal Housing Finance Agency's REO rental program may capture 20% of the nation's 7.5 million total foreclosure pipeline, according to analysts at Bank of America Merrill Lynch.

About half of the nation's real estate-owned inventory is in only 20 metropolitan areas, BofAML analysts note. So even if the program only focuses on those 20 areas, it captures about half of the 3 million government-backed mortgages that will liquidate over the next four years.

Since the end of 2006, about 4.2 million new renters entered the housing market while 1.2 million homeowners left. And the 7.5 million backlog of foreclosures will continue to transition homeowners to renters over the next few years.

"There is not enough rental inventory to meet this demand," BofAML analysts say.

It's another indication that the rental program is "here to stay."

Morgan Stanley (MS) recently predicted the federal initiative will create 1.8 million jobs, including more than 1 million in the hard-hit construction and real estate industries.

Last week, the FHFA announced the first pilot transaction under the program, whereby the government will take bids on nearly 2,500 properties in Atlanta, Chicago, Las Vegas, Los Angeles, Phoenix and Florida.

However, Capital Economics complains that it singles out properties already occupied by tenants. About 85% of the REO units due to be sold are already occupied by tenants, a figure that Paul Dales, a senior U.S. economist at the Toronto-based firm, said disappoints him.

"The pilot plan will therefore do almost nothing to reduce the number of vacant homes for sale or provide more homes to rent," he said.

BofAML said the key to the rental program is focusing on markets that both inhabit a large percentage of government REOs so investors can achieve economies of scale in managing the properties and have increasing rental demand so that the rental return is strong.

"This means targeting big metro areas, such as Atlanta, Chicago and Miami, will be more impactful than smaller cities with less housing turnover," they said.

jhilley@housingwire.com

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