Capital Economics: REO to rental ‘best housing fix so far’

Capital Economics called the program to move REO properties to rentals the “best housing fix so far” and “possibly more significant” than President Obama’s refinancing proposals announced late last month.

Capital Economics lists three reasons why they are hopeful about the success of the program, which would allow approved investors to purchase geographically concentrated REOs from government housing agencies under the requirement that the properties be rented out for a specified period of time. 

First, Capital Economics believes the initiative has a better chance of “seeing the light of day” because it does not require Congressional approval or any additional federal funds.

“Indeed, just last Thursday the FHFA announced a pre-qualification round for investors, who would soon be able to bid on REOs released in a pilot phase,” said a statement from property analyst Paul Diggle. 

Capital’s second reason is the large potential scale of the REO scheme, even considering that the 300,000 REO homes held by Freddie Mac, Fannie Mae, the FHA and FDIC are only a fraction of the “shadow inventory” of homes that sit vacant or are soon-to-be foreclosed on.

“The impact of the rental scheme could be much greater if you consider that many of the homes in the shadow inventory will eventually become REOs,” they said.

Third, Capitol Economics expects the demand for REOs sold under the program to be strong “given that up to 850,000 additional households a year could be looking for rented accommodation over the next few years,” and the low house prices and high rental yields should make the program attractive to investors. 

Capital Economics’ view that the program “could strike at the heart of excess supply in the owner-occupier market and undersupply in the rental market” is in stark contrast with the view of Barclays Capital (BCS), which believes the program will be too difficult to implement but may be beneficial to home prices.

“Rentals yields (adjusted for vacancies/future vacancies) are much lower than where bonds yields in the non-agency space were when the PPIP was announced,” analysts at the investment bank said. “As a result, the equity yields on such a program would look less attractive.”

The program was announced in August 2011. After issuing a Request for Information (RFI) seeking feedback on options for selling single-family REO properties held by the FHA, Fannie Mae and Freddie Mac, the agency received more than 4,000 responses from industry stakeholders. On Feb. 1, the FHFA issued a notice to investors interested in the program to register with Fannie Mae to pre-qualify. 

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