Bank, Real Estate Investor and REITS are Renting out Foreclosed Homes and then putting them into Rental-Backed Securities

Equity Funds and savvy real estate investors have been buying foreclosed properties alone and in bulk, with creating REITS specifically to buy in bulk foreclosed properties, and then raising more capital to buy more foreclosed or REO properties.

Wall Street investment banks and credit-rating firms are facilitating this program by packaging the foreclosed property rental payments into securities and then sell them to other investors.

This unique twist on the usual and traditional mortgage-backed securities is creating opportunities for Real Estate Investors (including REITS). Instead of the investor receiving the cash flow from mortgage payments the investors instead receive the cash flow from.

A recent report from Lender Processing Services stated that “5.57 million loans are either delinquent or in the foreclosure process, in addition to those already repossessed by lenders and the government.”

The real-estate-owned (REO)-to-rental products are starting to expand nationwide. There are some concerns from investors and the various bon rating services. The issue is there is limited data available regarding the payment history of REO-to-rental tenants of previously foreclosed homes.

David Jacob, who served as head of Standard & Poor’s Ratings Service’s structured-finance department from 2008 to 2011 is recently cited as saying “If rating firms don’t have the data, they shouldn’t rate the deals.” Is reported that S&P and Moody’s Investors Service has received inquiries and may have been asked to rate the REO-to-rental securities, and is getting questions from potential issuers.

One of the underlying issues for the REO-to-rental securities is the stability and history of the REO-to-rental income. The first issue is that very few firms that have rented foreclosed-to-rental homes for longer than a few months to several quarters. Secondly, the issue of proven track record of the property management of REO-to-rental presents has multiple complications, including the costs of the REO-to-rental property’s upkeep and management of previously foreclosed tenants. The third issue with REO-to-rental properties is setting market rents and leasing the property to the foreclosed property owner or a third party. The fourth issue is the expense to fix up (such as paint & carpet), if the property needs to be re-leased (Who will reimburse that property manager and who pays back the passive cash flow investor back for the expense to fix up (such as paint & carpet) and cost to re-lease the property?)

Several major Banks are exploring entering the REO-to-Residential Rental securitization business. It appears that even several investment banking firms such as Citigroup Inc., Jefferies Group Inc., and Wells Fargo & Co. are exploring the possibility of REO-to-rental securitization opportunity.

The US Federal Reserve, in January 2012, sent a paper to the members of US Congressional Banking Committees have specifically endorsing the concept of the possible conversion of foreclosed single-family homes into rental properties. It is reported that January, the Federal Reserve’s letter to the US Congress did not address, or even mention, the securitization of the REO-to-rental properties.

Across the United States there appears to be a reduction in the foreclosed single-family homes listed for sale. The answer for what is happening to foreclosed single-family homes pool for sale reduction is likely to be the combination of expanded bulk sales of REO properties to investors and the expanding of REO-to-rental properties programs.

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