In August 2011, the Federal Housing Finance Agency (FHFA) announced their mandate to reduce the volume of real estate owned (REO) properties, stabilize property values in areas hard-hit with foreclosures and increase the supply of affordable rental housing in those same markets. In February 2012, the FHFA launched the REO-to-Rental Pilot Initiative that will attract smaller investors and increase private investment in REO properties.

FHFA Overview
The FHFA has regulatory and supervisory oversight over Fannie Mae, Freddie Mac and the Federal Home Loan Bank System. The agency worked with the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Federal Housing Administration (FHA), the U.S. Department of Housing and Urban Development (HUD), the Treasury Department and many state and local governments to develop the REO-to-Rental Pilot Initiative to increase participation from smaller and private investors to purchase, rehabilitate, manage and rent REO properties in areas with declining market values and deteriorating conditions.

How the Pilot Program Works
Potential investors will register and complete a pre-qualification form online. This establishes eligibility to bid on pools of foreclosures held in REO status with Fannie Mae in the initial pilot phase. Future offerings will include REO holdings from Freddie Mac and the FHA. Qualified investors include partnerships, trusts and individuals along with banks, non-profit agencies and for-profit real estate businesses.

Investors are required to hold and rent the properties for a specified time. They must also provide affordable rents and lease-to-own options. This program is not for short-term investors, but rather those who are committed to long-term holdings and will operate under a business model that includes housing counseling for prospective tenant-buyers.

The target properties are in areas that have high numbers of foreclosed properties, and high rental demand. Most properties will be vacant single-family residences with nonperforming loans that failed the short-sale process. Many two- to four-family units in a foreclosure status will also be available. Some properties offered will be existing tenant occupied properties; others include owners who remained as renters after a foreclosure.

Traditionally, REO sales focused on large institutional investors and individual owner-occupant buyers. This pilot program allows small individual investors to bridge the gap, and fill an important niche missing in many depressed housing markets – that is, participation from local real estate investors who reside in or near communities they invest in.

Requirements for Individual Investors

1. Net worth of $1 million, individual or joint.

2. Net income of $200,000 individual, $300,000 joint.

3. Experience buying, selling, developing, managing real estate with emphasis on risk management ability.

Can the Program Work?
Either Fannie Mae or the FHFA will have to provide seller financing in order to make the pilot program successful. This reduces the role of these agencies in the housing market, something consumer advocates, market players and lawmakers are calling for. This also provides access to a blanket mortgage or other similar lines of financing traditionally not available to small investors in some areas. Structure and oversight should use strategies that worked well in the past, such as those the Resolution Trust Corporation used to solve the savings and loan failures of the past. Investors need tax advantages similar to those available through real estate investment trusts. Finally, regulatory controls must deter practices that helped fuel the current housing crisis such as inadequate renter-buyer income verification, property flipping and ownership/chain of title fraud.

The Bottom Line
This is an excellent opportunity for individual real estate investors, developers and property managers to enter or re-enter the buy-to-hold and rental real estate market under favorable conditions.

For more information about the Federal Housing Finance Agency's REO-to-Rental Pilot Initiative, visit the REO Asset Disposition page on the agency's website. Serious investors should also complete the Investor Pre-Qualification Process at Fannie Mae's HomePath website.

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