Wednesday, January 18, 2012

New Plan Turns REO into Rental Units

As the industry works its way through the millions of loans that have yet to go through foreclosure but that are bound to do so, some are working on what to do with those properties that are already back into the bank's hands. Fannie and Freddie have been asking for ideas for ways to quickly liquidate their REO holdings and now two firms in our industry may have an answer.

Carrington Holding Company, LLC (Carrington) has signed an agreement with certain investment funds managed by Oaktree Capital Management, L.P. that will fund an initial purchase of up to $450 million in distressed single family homes on a national basis. These homes will be managed as rental properties by Carrington, to meet the growing market demand for rental units, and as part of the industry’s effort to remove distressed properties from the sales inventory to help stabilize the housing market.

Some have suggested that the federal government, through Fannie and Freddie, should begin to rent out REO held by these investors. Most worry that turning the former GSEs into the worlds largest slumlords would be a very bad idea. I have to agree. But if the private sector could handle this, it might make sense.

Carrington, which currently manages over 3,000 single family rental homes under Fannie Mae’s Tenant-in-Place and Deed-for-Lease programs, was the first company to pursue a strategy of renting out REO (lender-owned) properties, and has developed a national field services network along with a proprietary software system that allows for centralized property monitoring and management.

“We believe that re-deploying vacant REO properties into rental homes is a way to help revitalize the housing market,” said Carrington Founder and CEO Bruce Rose. “Reducing the number of distressed properties for sale can help stabilize home prices and putting families into currently-vacant homes can begin the healing process for neighborhoods that have been damaged by foreclosures.”

“Carrington’s REO rental program is an excellent fit for our investment strategy, which includes a broad range of debt and equity investments in real estate-related investments and restructurings.” said John Brady, Oaktree’s head of global real estate. “We believe that this is not only a unique investment opportunity with few qualified large-scale competitors, but one that also has the potential to have a broader positive effect on the housing market and the overall economy.”

The success of this program will depend upon how well Carrington can manage renters, many of whom have already proven that they cannot or will not make payments on their residence. With more consumer credit defaults on the books in December, this may not be an easy thing to accomplish, but it's better than bulldozing them down when people still need homes.

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