The Federal Housing Finance Agency (FHFA) announced today the first step in a new initiative to convent foreclosed properties (REO) in the hardest-hit metropolitan areas to rentals. The Real Estate Owned Initiative is a joint endeavor of the Departments of Treasury, and Housing and Urban Development (FHMA's parent), the Federal Deposit Insurance Corporation, and the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

The first phase of the program will encourage investors interested in participating to "pre-qualify" to bid on property in the pilot phase of the program and any subsequent phases with the understanding these properties would be held as rentals for a specified period of time. The expectation is that the rental period will provide relief for local housing markets suffering under the large inventories of foreclosed and often vacant and/or deteriorating housing as well as providing additional options to some tight rental markets. 

During the pilot phase, Fannie Mae will offer pools of various types of assets including rental properties, vacant properties and non-performing loans for sale.  The first transaction will be announced in the near-term.

There has been a lot of discussion in recent weeks about the value of linking REO inventory reduction to rentals as one way of speeding recovery of the market.  Much of the talk was driven by a white paper prepared for Congress by the Federal Reserve which focused on the issue and the probable cost.   It said in part; "An REO to rental program that relies on sales to third-party investors will be more viable if the cost-pricing differential (i.e. the discount offered to investors) can be narrowed which might be done by (a) structuring sales as competitive auctions; (b) making sales packages more attractive to a variety of investors.  A third option suggested by the Fed, providing investors with the debt financing, does not appear to be part of the current strategy.

FHFA said it had received more than 4,000 responses for a Request for Information posted last summer which sought input on options for selling single-family REO held by the GSEs and FHA.  The pre-qualification step announced today will require potential investors to meet minimum criteria including, but not limited to the financial ability to acquire the assets, sufficient experience and knowledge to analyze and bear the risks of the opportunity, and agreement to keep certain information about the REO and related matters confidential.  FHHFA said the agency wants to ensure that investors have the financial capacity and operational knowhow to manage properties in such as way as to stabilize communities hard-hit by the housing crisis.  

"This is an important step toward increasing private investment in foreclosed properties to maximize value and stabilize communities," said FHFA Acting Director Edward J. DeMarco. "I am grateful for the collaborative effort by the many stakeholders including investors, nonprofit organizations, and state and local government officials, who have worked together on this Initiative."

FHFA said it continues to look for ways to improve its sales to owner occupants and small investors who constitute the majority of the market for Fannie Mae and Freddie Mac and who buy at close to market value.  The pilot phase is to determine the type of assets, size and location of pools, and the service and support necessary to appeal to investors who will best work to stabilize communities while maximizing the return to the sellers and improving home values in impacted markets.

Interested investors can obtain information about pre-qualification at   

Read the full FHFA announcement here.