Converting REO to rentals projected to be a $100 billion industry in 2012

A couple days ago, I postulated that lenders would utilize REO to rental programs to the extent feasible:

… First, it gives them immediate capital. They don’t have to wait as they slowly liquidate on the MLS. Opponents of these programs — mostly realtors who fear loss of commissions — postulate lenders will recover less when selling in bulk. Lenders will have to discount the properties more to liquidate in bulk, but they also eliminate a 6% commission to listing agents, so the net may be the same. And since lenders are recovering their capital more quickly, the benefits outweigh the discounts required.

Another advantage of the REO to rental program is that lenders don’t have to dispose of those properties on the MLS forcing prices to move even lower. When distressed sales dominate the market, prices move lower. If lenders can reduce the number of distressed sales, they can stop the decline in prices — which is why they are withholding inventory now. The REO to rental program takes sales off the MLS in 2012-2015 and moves them to 2016-2018 or later. This may stop the declines in the short term, but it will almost certainly inhibit appreciation in the long term as this overhead supply is metered out over time.

Since these two advantages to lenders are so beneficial, I suspect the REO to rental programs will see explosive growth over the next few years as investors gear up to buy billions of dollars worth of single-family homes. That’s how lenders will liquidate many of their upcoming foreclosures.

I am not the only one who believes these two advantages will compel lenders to try to sell a great many homes to investors.

Turning Foreclosed Homes Into Rentals Could Be $100 Billion Industry This Year

The Huffington Post | By Harry Bradford Posted: 04/13/2012 3:39 pm Updated: 04/13/2012 3:39 pm

The business of turning foreclosed homes into rentals is set to boom.

The practice could be a $100 billion industry this year, according to a report from real estate tracker CoreLogic. That’s equivalent to $125 for every Facebook user, the cost of halving global poverty for two years and 250,000 times the salary of the President of the United States, according to The Guardian.

I have been lamenting the collapse of my industry over the last five years. Perhaps now I am positioned to benefit as money pours back into real estate. Not many have my experience with converting REOs to rentals.

Why is the market for foreclosed properties-turned-rentals poised for a boom? In the aftermath of the housing bust, demand for owning homes has fallen, pushing rents up and home prices down. In response, everyone from big banks to smaller firms are increasingly taking advantage of the disparity by turning foreclosure properties into rental homes.

I was ahead of the market when I suggested prices would crash in 2006. I was ahead of the market again when I said buying rentals was a good investment in 2010.

Bank of America is currently running its own pilot program to rent homes to families that have been foreclosed on, called Mortgage to Lease. In addition, private equity firms and hedge funds are now spending hundreds of millions of investment dollars and racing to buy up foreclosed properties.

In turn, Bank of America and government mortgage giants Fannie Mae and Freddie Mac are responding to the demand, selling off their holdings of foreclosed homes by the hundreds. Just this week, Bank of America announced a bulk offering of 500 foreclosed homes in six different states, following up on an offering of 200 properties late last year.

Meanwhile, Fannie Mae and Freddie Mac have sparked a bidding war when it put up 2,500 of the 200,000 foreclosed homes it currently owns for sale. That’s because Wall Street firms say they’re interested in buying up the properties and renting them out.

The practice of turning foreclosed homes into rentals is becoming so popular that the Federal Reserve issued guidelines earlier this month for banks to use when they’re flipping foreclosures into rentals. But the practice also faces criticism: Namely, some are concerned that the very banks and agencies responsible for the housing crisis in the first place will now benefit from their own questionable practices.