Obama Foreclosure to Rental Plan Being Readied: Report (Update 1)

Foreclosure story updated with recent commentary from Goldman Sachs.

NEW YORK (TheStreet) -- The Obama Administration is close to announcing a pilot program to sell government-owned foreclosures in bulk to investors as rentals, CNBC reported citing unnamed administration officials.

The Federal Reserve, Treasury, HUD, Fannie Mae (FNMA) and Freddie Mac (FMCC) are working out details of the plan, including what the pricing for such a sale would be, the government's role in the plan and identifying those with the operational experience to manage such properties, according to the report.

The policy aims at reducing the foreclosure supply in the market, which has been depressing housing prices, while capitalizing on increasing demand for rental homes.

Banks repossessed fewer homes in 2011, but much of the slowdown was because of foreclosure processing delays. The recent spike in "default filings" points to a fresh wave in foreclosures in 2012, according to RealtyTrac, which could hold prices down further. The number of properties in the foreclosure pipeline is more than four times the number of REO -- or real estate owned properties -- for which foreclosure processing has been completed, according to the Fed.

Meanwhile, rents have risen in the past year, with the vacancy rates of multi-family units dropping, as families who are unable or unwilling to purchase homes have chosen to rent instead.

Families who have lost their homes to foreclosure also tend to move to single-family rentals, so a proposal to convert foreclosures to rentals will also make sense.

The Fed has been pushing for a foreclosure to rental conversion plan. "Reducing some of the barriers to converting foreclosed properties to rental units will help redeploy the existing stock of houses in a more efficient way. Such conversions might also increase lenders' eventual recoveries on foreclosed and surrendered properties," the Fed noted in a white paper released last week.

The Federal Housing Finance Agency, the conservator of Fannie Mae and Freddie Mac, released a request for information on August 10, 2011, to collect information from market participants on possible ways to convert foreclosed property to rentals and received more than 4,000 responses.

The Fed has said it is working on designing the foreclosure-to-rental plan, but as no program currently exists, it expects "ongoing experimentation and analysis" is key to the program.

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