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
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
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
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
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
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
"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."