Ben Bernanke's Solution To The Housing Crisis: Renting Foreclosed Homes
While millions of foreclosed homes languish on the market at lower and lower prices, new data supports the idea that renting out these foreclosed homes could be the long-sought solution to the housing crisis. Rental units are leasing quickly, and the vacancy rate for apartments is at its lowest level in a decade, according to data released Thursday. In many areas, rents are rising.
On Wednesday, Federal Reserve Chairman Ben Bernanke got on board, penning a 26-page white paper, arguing that now is an unusually good time to convert foreclosed properties to rental units for three reasons: demand for owner-occupied homes remains low, demand for rental properties is rising, and the problem of banks' continued hesitance to offer mortgages to everyday Americans means that the situation won't change anytime soon.
The federal government's recognition of the value of renting foreclosed homes is not entirely new. In August 2011, the Federal Housing Finance Agency, the government body that oversees troubled mortgage giants Fannie Mae and Freddie Mac, requested proposals on how to implement such a program. The agency received over 4,000 responses, and is currently sorting through them as it considers how best to handle Fannie Mae and Freddie Mac's foreclosed properties. The two mortgage companies collectively own roughly half of the nation's foreclosed homes.
However, the just-released white paper expands the conversation by identifying obstacles to transitioning foreclosed homes to rental units, challenges that some housing practitioners say are easily surmountable if there is the political will and financial incentive to fix them.
According to the researchers, although small investors are buying and renting foreclosed homes, larger investors capable of scaling up such a model have not entered the market because it's hard for an investor to collect enough homes in a single geography.
"That's a small problem," said Laurie Hawkes, president of American Residential Properties, an Arizona-based firm that has bought, and then rented, over 500 foreclosed properties in the Southwest, and is nearing completion on a $100 million deal to acquire an additional 800 homes. "Most of the big players have so many foreclosed homes on their books that that's the least of their problems."
The larger issue, according to Hawkes, is the lack of financing available for the transactions. "The government has been offering attractive financing for years to developers of multi-family rental units. There needs to be a comparable program for single-family rentals, something straightforward that is cheaper than the equity financing investors will otherwise have to look for. That's how you lower the costs of doing this work."
Bernanke's paper did acknowledge the need for funding for a rental program, but left vague how the financing would work or who would provide it. He instead cautioned that any subsidies could increase the cost of such a program.
Another obstacle identified by the Federal Reserve is the fact that the companies that own the foreclosed properties -- Fannie Mae, Freddie Mac, various banks -- don't want to sell the homes with the level of discount required to attract investors. Dean Baker, an economist and one of the earliest proponents of the rental model, disagrees.
"If they're measuring the cost of selling at a discount versus at the face value of the mortgage, it's a moot point because we're in a depressed market," Baker said. "It's difficult to find a buyer for an owner-occupied home anytime soon, so why not provide a discount on rental sales?"
Housing practitioners are also frustrated that the Fed report places relatively little emphasis on the idea of renting the home back to the previous homeowner.
"Overall, the paper focuses on vacant properties where someone with no emotional tie to the property is invited in to rent it," said Jorge Newbery, director of American Homeowner Preservation, a company that has purchased, and subsequently rented, more than 400 foreclosed properties nationwide. "If you can rent to the former owner, and give them the chance to buy back the home at some later date, then you're going to have an ally in caring for the property. Their interests as the potential owner, and your interests as the investor, are aligned so you end up with a much more efficient system."
Hawkes agrees that the report overlooked a key opportunity in the rental market -- short sales where a borrower sells the home, in this case to an investor, for less than the amount outstanding on the mortgage. "Right now, if you wait until foreclosure, that borrower has been bounced from their home, and it's incredibly disruptive," she said. "With a short sale you eliminate the stigma of the financial hardship for the borrower. As an investor, I'd pay more to get that home as a short sale."