Analysis: Rentals hold a ray of hope for U.S. home prices

NEW YORK Thu Oct 7, 2010 4:22pm EDT

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NEW YORK (Reuters) - For rent: The American dream. House, yard, white picket fence. Previous owner foreclosed. Available immediately.

As the supply of empty houses and apartments grows for the third year and threatens to mount still higher, lenders taking back ever more homes are starting to see the benefits of being landlords.

Exact numbers on renting "REO," the industry's term for repossessed homes, are hard to come by. Only one property manager, Carrington Property Services, would disclose its numbers. It manages 4,200 rentals for an affiliate and for U.S. mortgage finance source Fannie Mae.

There is more demand these days from renters than buyers, so Carrington and others are seeing their interests better served by collecting rent on repossessed properties, while hoping to sell them later for a profit.

More rentals would also cushion home prices by reducing the supply of empty and cut-rate housing glutting the market and blighting neighborhoods.

"Everyone knows there's a lot of foreclosure inventory in the pipeline and what will control housing prices is the rate at which it hits the market," said Josh Levin, a homebuilder analyst for Citi. "If home prices start to drop, you'll hear more about renting."

There is a long way to go. Lenders are dealing with 2 million foreclosures and REOs, and only about 485,500 of those are on the market, most of them for sale, according to foreclosure website RealtyTrac.

"There's this inventory of properties that needs to get back into the market. Renting will be one way to do that," said Chris Orlando, spokesman for Carrington Property Services, which is handling single-family rentals for U.S. mortgage finance source Fannie Mae.

A STRATEGIC APPROACH

The idea of renting repossessed homes is not new. But private entities -- banks, mortgage investors and the "servicers" that manage mortgage payments, defaults and foreclosures for lenders -- are warming to it, said Real Property Management CEO Kirk McGary.

In the past year, McGary has signed several top-tier banks as clients. He would not disclose their names.

He is also a government contractor for the original rental program. Announced in November, Fannie Mae's Deed for Lease lets foreclosed owners rent their own homes.

And starting in May 2009, with the passage of the Protecting Tenants at Foreclosure Act, lenders foreclosing on a landlord had to honor tenant leases for a year.

That act was a turning point for private lenders, said Denia Graham, chief operating officer at TenantAccess, a property management company that rents REOs. It got them used to being landlords and to working with management companies, she said.

"We are starting to see a shift," she said. "It's a more strategic approach. How can we make the home an income-producing property and sell it at the same time?"

In the last three months, she said, a small servicer hired TenantAccess to rent REOs for at least a year in states such as Arizona and California that have seen the most foreclosures.

"We are not trying to relocate or offer cash for keys," she added. "We are trying to keep the tenant in place."

The client, whose name Graham would not disclose, knows it must charge market rents, which are typically much lower than the mortgage payments it would have received from a viable homeowner, to find a tenant.

COURTING CLIENTS

More lenders are also considering renting because local and regional property management firms have grown their business precisely to serve this national market of lenders-turned- landlords, said David Tiberio, a spokesman for First American National Default Title Services.

So far, most of First American's clients are banks complying with the foreclosure law.

But the company is also courting clients who have "demonstrated an interest" in more renting instead of just pushing to evict the people living in their homes.

The biggest market will probably be investors who plan to buy a REO and rent it out themselves, said Tiberio.

A property that comes with rental income will fetch a higher price for the lender who is selling it, Tiberio said, and make it easier for the investor buying it to get financing, Graham said.

Obstacles to more widespread renting persist, including actually being a landlord.

"It's a headache," said David Benham of Benham REO.

Also, the "mortgage mess," in which major lenders suspended foreclosures after revelations officials approved them without reading case files, will drag out the foreclosure crisis, said Daniel Alpert, a managing director for Westwood Capital, who has done research on housing and credit bubbles and proposed his own rental scheme in 2008.

But every home rented is one less sitting empty or dragging down the prices of nearby homes by setting a new and lower comparison price for the neighborhood.

"It will stop the very harmful process of being forced to foreclose on defaulted occupants or borrowers that creates a flood of houses on the market," Alpert said. "But in the end of the day, we're still in the process of absorbing an excess."

(Reporting by Helen Chernikoff; editing by Robert MacMillan and Andre Grenon)

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