U.S. Government Seeks to Sell Foreclosures as Rentals

The federal government will soon begin selling government-owned foreclosed properties in bulk to investors as rentals, in a new effort to dispose of its growing portfolio of distressed properties, according to CNN.

Government-controlled mortgage guarantors Fannie Mae, Freddie Mac, as well as the Federal Housing Administration (FHA), collectively own over 220,000 foreclosed properties.

Successful sales could also help the government manage the millions of foreclosures still unprocessed due to paperwork discrepencies. Another wave of foreclosures would make the existing stock even harder to sell, and more distressed properties on the market are expected to create further drag on U.S. home prices.

Vacant, foreclosed properties have also been found to negatively impact the property values of surrounding homes.

A report released last week by Lender Processing Services found that while foreclosures starts, the beginning of a foreclosure process, decreased compared to the prior year, there were twice as many foreclosure starts as sales in November because lenders struggled to unload properties amid a weak housing market.

But government officials told CNBC that institutional investors, as well as locals, could be potential buyers for converted rental units. The U.S. rental market has been strong, with 10-year low vacancy rates and rising rents, thanks to higher demand and minimal rental construction in recent recent years.

Last week, the Federal Reserve wrote in a report that mortgage holders, particularly Fannie and Freddie, should explore converting foreclosed properties into rentals, which could make recouping the homes' value easier. In choosing to sell the properties as rentals, the federal government would avoid additional costs associated with being rental landlords. It is also consistent with the government's goal of attracting private sector investment back into housing.

However, buyers of the properties would have to obtain financing for the deals, as well as incur the costs of managing and renting out the properties after acquiring them, which could weaken demand for the properties.

A timetable for the pilot program of the sales hasn't been announced, but CNBC said that an announcement would come very soon.