My Real Estate Blog

On August 10th, The New York Times reported: “Uncle Sam wants you — to rent a house from Uncle Sam”.  The gist of the story is that the Obama administration is seeking ideas on how to convert the federal government’s inventory of foreclosed properties into rental properties that can be managed by private enterprises or sold in bulk.  The goal here is to stabilize housing markets around the country that are suffering through a wave of foreclosures.  Today, rumors of turning foreclosures into rentals are surfacing again.  Is this a good idea?  If so, how should such a program be organized and managed?  What are some of the potential downfalls of such a program?
To begin with, this is, in general, a good idea for a number of reasons.  First, vacant non-performing assets (empty properties) will begin to provide returns and thus mitigate total eventual losses to lenders and thereby lower the tab to all.  Second, the program should slow down the flood of foreclosed properties and should help stabilize pricing as traditional home sellers will now have fewer foreclosures to compete against.  Third, the program would allow lenders (Fannie, Freddie, and others – perhaps the original lender) to time the selling of foreclosed properties, which would assist in stabilizing the housing markets around the country.
If turning foreclosures into rental happens, what should not be done?  Renting to the previous owners should not be allowed as this would create significant conflicts of interest, which could easily lead to a deluge of lawsuits resulting in the failure of the program.  Additionally, social engineering should not be allowed.  Let the marketplace decide rent levels.
Where might problems arise from turning foreclosures into rentals?  Though they are very similar, foreclosure laws vary by state.  One general commonality among the various laws is that the lender must mitigate the loss to the previous owner through a timely resale of the property.  These laws can be thought of as the Milton Drysdale deterrent.  It is simply not in the best interest of society to allow lenders to foreclose on property, ride out the tough times, and then resell at a huge profit.  However, these laws never contemplated a situation where foreclosures would be as rampant as they are at present.  Regardless, if the federal government, through Fannie, Freddie, joint ventures with outside investors with Fannie and Freddie, or even the original lenders themselves, becomes a landlord looking for a better environment in which to sell, the likelihood of lawsuits over violations of state foreclosure laws is almost certain.  That is to say, we will probably have “Robo-signing II”.  Thus, the big question is will Congress be willing to back turning foreclosures into rentals with a federal law that overrides state foreclosure statutes.
Four years ago, I told a graduate audience that banks should get ready to manage property in order to mitigate losses from the coming real estate crisis.  However, state laws would probably prevent this and that federal legislation was needed to allow for lenders to manage and/or re-sell property in a way that balanced market stabilization with mitigating losses to the original owners.  Is turning foreclosures into rentals a good idea?  Yes, the idea is sound.  The only surprise is that it took this long to get around to considering this eventuality.

This article is from KCM speaker and market analyst Steve Harney.