Plan would turn foreclosures into rentals

People look at a foreclosed home on August 29, 2010 in Seymour, Conn.

JEREMY HOBSON: Today the Obama administration will formally ask the public for ideas to help clear out the nation's stock of foreclosed homes and fix the housing market. The most prominent idea in the mix: turning foreclosed homes into rental properties.

Marketplace's Jeff Horwich reports.

JEFF HORWICH: A foreclosed home is a problem for the neighbors, the bank that owns it, certainly the family that lost it -- but it's a problem for the rest of us, too. Banks price them at rock-bottom to get rid of them, and that depresses prices for the whole market. The government, through Fannie Mae, Freddie Mac, the Federal Housing Administration -- own hundreds of thousands of foreclosed homes.

Nicolas Retsinas heads the Joint Center for Housing Studies at Harvard. He says these government entities are looking for ways to entice investors who will to turn the foreclosures into rentals.

NICOLAS RETSINAS: The problem with that is the price investors would require to make the numbers work, to make the economics work, would require the government to take very significant up front losses.

While the plan may help reduce the foreclosed homes on the governments books -- and juice the market accordingly -- about half of unsold foreclosed homes are held by private banks.

I'm Jeff Horwich for Marketplace.

About the author

Jeff Horwich is the interim host of Marketplace Morning Report and a sometime-Marketplace reporter.
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It seems like there's an elephant in the room and no one wants to talk about it: Home prices are too high.

Let me explain that as more than an opinion:

Let's stay "traditional" and assume that we're only talking about single family owner occupied homes.

There's a pool of buyers: People who want to own a home and also earn enough money to afford the upkeep of such a home.

And there's the housing stock: All the vacant homes.

If the vacant homes went to market and sold at whatever price people were both willing and able to pay, there would be no vacant homes. Unfortunately, that's not what happens. Owners/banks/everyone wants the homes to be sold at a higher cost than the market will bare. That's the big problem here. We're trying to force the market prices away from their rightful place and now we've got consequences to deal with for doing so. We've simultaneously got high vacancy ratings AND high buyer desire. If we were talking about food, this wouldn't seem so complicated. The problem is both obvious and simple. Let it play out, or better yet, encourage it to play out.

If we force vacant homes to be sold to buyers who must live in them and upkeep them, then the houses will sell. ...just not at the price that the current owners want. We as a country seem to be willing to spend billions to make sure that this doesn't happen. Frankly, I'd like to see home prices that were similar to what my parents and grandparents saw. Whole books on fiscal responsibility had to be re-written for my generation because their guidelines for responsibility were no longer practical. The problem is astoundingly simple: The rent/mortgage is (literally) too damn high. Housing costs have been eating up a larger and larger chunk of our incomes, yet still serve the same function they always have. The pendulum needs to be allowed to swing back to it's proper setting. When it does, we won't have many "problems" with vacant housing.


Have you heard of FHA Renovation Loans? I just bought my 1st house with one. They're a bit of a pain to set up, but they solve your exact complaint and a whole lot more. The streamlined loans (under $35k needed in repairs) don't have too much oversight and are pretty simple. I'm completing the process right now and highly recommend it.

I written this here before, but I'll do so again. The requirements placed on the homes of buyers getting government help such as veterans and first time home buyers all but preclude purchasing foreclosures. A $50 broken window in a foreclosed home can make it ineligible for the vast majority of real buyers in the market.

I suggest that the government allow buyers eligible for assistance to buy houses that can be brought up to standards with less then $1000 worth of repairs.

Preface: the car industry crisis has been resolved pretty quickly. How? By providing high incentives to the industry and to the buyers. Focusing on the buyers: $0 down payments, 0% interest rates, and similar initiatives have made the deals really attractive to consumers. Suddenly the entire auto industry is back into profitability.

My idea for real estate is similar: rock bottom interest rates (we’re there already more or less) and $0 down payments (not there yet). Also we need to target as much population as possible. A substantial segment of the population cannot access the market because of credit issues.

We all know the federal assisted residential lending system (without any newest regulation) has failed and is the main reason why we find ourselves in this crisis.

Objective of my idea: to create a new secure channel/process allowing several additional buyers to reach the real estate market. This new channel would originate almost exclusively by linking purchase power (or better borrowing ceiling) to occupation (salary, job security, job seniority, etc.).

Similarly to an employer sponsored health care plan or retirement plan, I would create an employer sponsored home purchase plan that allows employees of a given company to purchase a home by using the company itself as their guarantor.
The company would select a financial entity to materially underwrite the loans, the requirements and manage the process from a fiscal point of view (similary to how today firms selects a healthcare's company 'partner'). The company would also select a real estate company that would manage an inventory of properties around the area, would manage repossessed homes (from employees that leave the company for whatever reasons, etc.), and any other real estate task.
Qualification to borrow would be derived from job records like employment history, salary, etc.

Advantages: as long as a company is financially stable (not every company would qualify for such system), this new home purchasing system would qualify a complete new category of buyers who could have poor credit based on traditional criteria but have a stable/secure occupation. Secondly such program would have mortgage payments that would be electronically deducted from a paycheck eliminating any late payment chance and giving further strength to the industry. Moreover it would improve mobility issues by locating more employees around the company itself. Innumerous variation on this program could be built (lease to buy, property transfer in case of relocation, etc.)
Because of the system's financial soundness even $0 down payment contracts could be underwritten!

One main requirement: strong fiscal incentives should be provided to companies that join the program while the same companies should commit to embrace a severe circumstances only termination policy (a state/county committee could be created to protect the rights of employees/buyers in the program). Also in case of termination several procedures could be implemented (returning principal balance to buyer/etc., adding the property to a preferred properties list that other employees can buy at discounted price, etc.).

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