Redwood Real Estate Partners, Inc said on Wednesday it launched a fund to buy up to $500 million in distressed residential real estate amid an expected surge in bank-owned properties.

The Rancho Santa Margarita, California, real estate company will focus on bulk sales of homes weighing on bank balance sheets, currently selling at 60 cents to 85 cents on the dollar, said Carl Chang, Redwood's chief executive officer.

Financial distress, and lack of liquidity (have created) some large buying opportunities that I hadn't even seen in the late 1980s and early 1990s when real estate markets were under stress, Chang said.

Redwood's recent $44 million investment in bank REO (real estate owned) produced up to 35 percent returns, he said.

Bank-owned properties have soared as falling home prices, risky mortgages and the economic recession boost foreclosures to record highs. The foreclosure rate hit a record in April -- up 32 percent from a year earlier -- after moratoriums expired. That will probably result in a corresponding spike in REO, according to RealtyTrac.

In the meantime, mortgage companies are stepping up sales of REO by slashing prices, Thomas Lawler, founder of Lawler Economic & Housing Consulting, wrote in a client note.

Fannie Mae, the largest provider of funding for U.S. home mortgages, this month said its inventory of properties owned through foreclosure fell last quarter to 62,371 from 63,538 in December, even as new acquisitions jumped.

The new Redwood fund, the Occasio Distressed Residential Fund, will be led by John Duden.

California Mortgage Fannie mae U.S.