Freddie Mac pitches REO plan to mortgage-bond investors

Fri Feb 17, 2012 11:59am EST

NEW YORK, Feb 17 (IFR) - Freddie Mac has begun talks with institutional mortgage-bond investors interested in buying hundreds of distressed single-family residential properties across the US in order to convert them to rental units, according to people with knowledge of the discussions.

Freddie Mac is making efforts to fast-track its own version of a proposed US foreclosure-rental program, even though the Obama administration and the US Federal Housing Finance Agency have so far only officially sanctioned a Fannie Mae "real-estate owned to rental" pilot program, announced on February 1.

The FHFA, which regulates both Fannie Mae and Freddie Mac, did say at the time that similar foreclosed-home sales from Freddie Mac and the US Federal Housing Administration "may be considered" at a later date.

However, Freddie Mac's own plan has apparently gained traction over the past two weeks, and its proposed strategy of disposing of its enormous overhang of REO properties is likely to differ from Fannie's in important ways, particularly in how qualified investors may be able to procure financing to buy the pools of foreclosed single-family homes.

Fannie Mae and Freddie Mac - the so-called GSEs - and the FHA own approximately 215,000 distressed properties that they are trying to clear from their inventories. The Obama administration unveiled the Fannie Mae REO-to-rental pilot program as one of several measures to help to bolster a US housing recovery.

A spokesman for Freddie Mac would not confirm or deny that it was moving forward with its own foreclosure-rental plan, but did say that the quasi-governmental lender was closely watching the outcome of the Fannie Mae pilot program.

A TAILORED APPROACH

One problem facing investors is that managing and converting possibly vacant or blighted properties to rentals is costly and time-consuming. This is why mortgage-bond investors and private-equity funds view the ability to get financing and the possibility of leveraged returns as prerequisites for moving ahead with the purchase of REO properties, according to securitization specialists.

Freddie Mac may be the first to pull the trigger to accommodate their needs. Not only is the GSE close to obtaining approval for a new single-family rental investor-loan product to help investors to finance their REO purchases at appropriately low leverage levels, but this product may eventually be securitized in the same way that the GSEs currently securitize multi-family (apartment-complex) loans.

"This proposed product is moving along quickly, though the FHFA might be a hurdle," said a senior RMBS investor. "There are questions as to whether this product would require a change in Freddie Mac's charter, as it represents an expansion of the GSE's activities at a time when the government is supposed to be diminishing them. But it is nearly approved."

Moreover, Freddie Mac's REO-property sales, unlike those of Fannie Mae, will be tailored to sophisticated RMBS investors that want to cherry-pick the properties they are most confident about. RMBS investors with expertise in understanding particular geographical regions, or houses worth a certain amount, are keen to make prudent choices on properties with attractive rental yields.

Fannie Mae's program, however, which has already started to pre-qualify investors, hinges on large "bulk sales" (possibly 500 to 1,000 properties at a time) that will saddle investors with unwanted, less attractive or unfamiliar properties that they will be forced to buy along with other homes in the pool that they do want to acquire.

Critics say that real-estate investors may ignore the properties they don't like, and that this will effectively lower the price of their overall bids on the pools, which are already deeply discounted.

FINANCING POTENTIAL

According to sources who have seen a term sheet of Freddie Mac's proposal, however, the GSE is leaning towards a less burdensome approach, and may potentially offer financing to investors that wish to be more discerning in the properties they buy.

These investors could acquire specific properties in a variety of ways: through foreclosure sales, REO sales, or so-called short sales, whereby a lender agrees to a discounted payoff when a property is sold.

The Fannie Mae program is likely to offer seller financing for its program as well, although details have not yet been revealed.

"Freddie is more likely to allow investors to buy what they want to buy, through any channel, and lend to anyone who is a qualified operator with a portfolio," said the investor. "This allows institutional investors to buy properties that they think most prudent, which will surely garner the highest overall price, compared with the 'bulk sale' method used by Fannie."

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