Maybe There’s Something To This Obama Foreclosure Plan After All

by Simon Lindsay on Foreclosures

A plan floated by the Obama administration a couple of months ago to sell off tons of government foreclosures to private investors is actually starting to take traction – contrary to the expectations of critics when the plan was announced.

While nothing is fully official yet, the Obama administration wants private investors to enter into partnerships with the federal government and take over somewhere in the neighborhood of $30 billion worth of single family homes owned by the government. These repo homes are owned by Fannie Mae, Freddie Mac, and the Federal Housing Administration (HUD homes) and are weighing down federal balance books, theoretically costing taxpayers a lot of money.

When the plan was originally put forth in August, the idea was to sell off these foreclosures under the condition that private investors then convert the homes into rental properties. This would help satisfy high rental demand in most markets and also give housing options to those who lost their homes to foreclosure auctions. Furthermore, the plan would involve the participation of private lenders because it would allow them to make a profit, due to the discounted nature of foreclosure properties.

The last part of the plan is what is attracting investors. Several fund managers, particularly fixed-income funds, have shown high levels of interest in the plan and have participated in the government’s outreach program to solicit ideas for implementation of the eventual plan. The idea is that investors can use pooled capital to purchase bulk distressed properties, rehab them, and put them back on the market as income-generating rentals.

And even considering the fact that many foreclosures are run down victims of neglect and would cost tens of thousands of dollars to make livable, there are still plenty of sound homes available for investment purposes.

Questions remain, however. One major issue to be addressed is how to provide incentives to private investors to take on the risk involved in the program. Financing is one key component of this solution, and the government could offer lower interest rates or tax cuts and credits to offset some of that financial risk. Until risk is addressed, however, investors will largely stay on the sidelines.

There is more to come about this plan, and it is still in the planning phases. But there is a lot of promise to the idea and could be a pattern for more partnerships between the private sector and the government in the future.