The Federal Housing Finance Agency's pilot to sell real estate owned homes to investors disappoints as it singles out properties already occupied by tenants, according to a new report from Paul Dales, senior U.S. economist for Capital Economics.

The pilot program will involve the sale of 2,490 REOs, or 1% of the REO assets held by Fannie Mae and Freddie Mac, to investors in an REO-to-rental plan.

Dale said he is "disappointed that 85% of the REO units due to be sold are already occupied by tenants."

"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.

Dales said the program does not address the fact that the housing supply is extremely high and demand remains low. In addition, he said higher mortgage fees could end up reducing housing demand rather than lifting it. 

The Federal Housing Finance Agency announced the pilot program Monday, saying the government will begin taking bids on certain REO assets. In response to questions raised about the program's potential to deal with vacant properties, FHFA said, "As the management response indicates, we are concluding our supervisory work in this area and we will direct the enterprises to take whatever action is warranted once we are done."

Meg Burns, senior associate director of Housing and Regulatory Policy at FHFA, said, "The pilot transaction very much gets at the issue at hand—helping to stabilize communities by keeping people in their homes where possible. This helps stabilize neighborhoods because many of the properties will continue as rentals instead of moving quickly to the for-sale market. In addition, it is easiest to price properties with renters already in place, which should help to attract investor interest."

Dales suggested higher fees on borrowers with FHA loans will not be onerous; however, it still comes at a time when he believes "the administration should be implementing policies that boost housing demand not reduce it."