Big investors are showing interest in an evolving Obama administration plan to sell off foreclosed homes, although the government will have to make the offer sweet enough to coax private funds.
The White House is assessing how best to encourage private companies and investors to snap up foreclosed properties held by the government and convert them into rentals.
Officials want private partners to take over as much as $30 billion in single-family properties that are currently on the books of government-run Fannie Mae, Freddie Mac and the Federal Housing Administration.
Several money managers with large fixed income funds are interested, according to sources, and a request for ideas on how to construct a program received nearly 4,000 responses.
A glut of foreclosures has weighed on home prices and the overall economy. An effort to get some of that inventory off the market could help stabilize it, while providing affordable rental options to Americans unable to obtain a mortgage.
The foreclosure conversion program would come as the next step to complement other government supports for housing, including an expanded refinance program announced on Monday.
The main question for prospective investors, which include broker-dealers and firms already overseeing similar rental programs, is the type of financing the government will make available -- an issue officials are still struggling with.
In order to get a better bid, there has to be some incentive involved to get qualified investors involved, said Ron D'Vari, co-founder and chief executive of NewOak Capital. The reality is not a lack of interest, but so far it looks like a lack of financing.
Incentives could include low interest rates, tax benefits or some type of rental assistance, said D'Vari, a portfolio adviser who has been involved in mini-bulk auctions of real estate-owned properties, or REOs, in California.
REO properties are those acquired by a lender, whether a bank or the government, after an unsuccessful auction attempt. Fannie Mae, Freddie Mac and the FHA own about 250,000 properties, close to a third of the country's REO pool.
LOOKING AT OPTIONS
One key challenge would be finding big enough blocks of properties in specific geographic areas that could be sold at one time. Analysts say this is what it would take to make the program attractive to large institutional investors.
The transaction and liability costs property managers will face as they try to bring deserted units back up to code also pose a hurdle.
The government also needs to determine how it will protect taxpayers, and it might explore ways to pair up with investors and allow Fannie Mae, Freddie Mac and FHA to keep some type of an ownership stake in the rental properties.
A public-private partnership, somewhat along the lines of a program the Treasury tried to use to soak up toxic bank assets during the financial crisis, would allow the government to gain from the sales.
The submissions are a source of ideas, some of which may be incorporated in transactions, and they supplement work that has already been done, a spokesperson at the Federal Housing Finance Agency, the regulator for Fannie Mae and Freddie Mac, said of the suggestions from private investors.
We don't believe there is any 'best' program. For any given locality, market conditions may dictate one or another type of transaction, the spokesperson said, without elaborating.
Fannie Mae, Freddie Mac and the FHA have already undertaken some small efforts to reduce the backlog of foreclosed homes. They have donated a few vacant properties for demolition and have held some small auctions.
Having already received $141 billion in taxpayer support since being seized by the government in 2008, Fannie Mae and Freddie are under enormous pressure to make sure they maximize the returns from the properties they hold.
This has got to be thought out. Fannie and Freddie would need to assess if they are getting the return they need from a rental, said Ken H. Johnson, a real estate professor at Florida International University. Johnson said one way to get over the hurdle would be for the two agencies to be given an explicit mission of market stabilization.
(Additional reporting by Matthew Goldstein and Jennifer Ablan in Los Angeles; Editing by Diane Craft)