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Fannie and Freddie Missing Out On Rental Wave (Update 1)

Stocks in this article: FNMA FMCC BX CLNY

Colony Financial has an equity stake in Colony American Homes, which was one of three winning bidders in Fannie Mae's pilot program. Colony was awarded a portfolio of 970 Fannie- Mae foreclosed homes in Phoenix, Arizona, Riverside, California and Las Vegas, Nevada according to a transaction summary filed by the FHFA.

Colony paid $35 million for a 10% equity stake in the portfolio. Under the deal, the firm receives 20% of the gross rental income as a management fee and 10% of revenues until Fannie Mae gets $136 million. Thereafter, Colony and Fannie Mae split the distributions from the business equally.

Of course, the real boost for Colony likely comes from the enormous home price appreciation these cities have experienced in the past year. Home prices in Phoenix, Arizona were up 19% year-over-year in April, while prices in Riverside, California were up 16%, according to data from CoreLogic.

Saltzman did not elaborate on the performance of the real estate portfolio. But he said he does not expect Fannie Mae or Freddie Mac to aggressively dispose of their REOs in bulk sales now that they were once again a source of revenue for the government.

"Just given what a hot potato - candidly -- the whole GSE situation is and given that GSEs are profitable and a source of revenue for the government as opposed to a source of distress and given that things are looking better for housing in general, I think the pressure is off for the GSEs to continue to do these divestitures," he said. "Time will tell. Depending upon who really is in a managerial position the kind of focus on these initiatives and these efforts will also have a big influence. But it does not appear there is going to be a big pipeline of this stuff from where we sit today. "

Fannie Mae and Freddie Mac held about 150,000 foreclosed properties on their balance sheet as on March 31, 2013.

Both reported improving recoveries on the sale of foreclosed homes on the back of rising home prices. At Fannie Mae, net proceeds from the sale of foreclosed homes improved to 65% of unpaid principal balance in the first quarter of 2013 from 56% a year earlier.

But the companies still face significant challenges in selling their inventory of homes. A significant portion of the REOs the agencies own are simply not marketable.

Fannie Mae said in its latest 10-Q filing it is unable to market 42% of the more than 100,000 foreclosed homes on its books because many homes are in redemption status, where the borrower gets a chance to win back a home lost to foreclosure.

Other homes are occupied by borrowers who are yet to be evicted or by tenants under its deed-to-lease program. Still others are in need of repair.

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