When the Obama administration announced the REO to rental program in the beginning of February there was finally a sense of large scale action on the abysmal housing situation in America.  Real-estate-owned (REO) properties, held by such federal entities as Fannie Mae, Freddy Mac and the Federal Housing Administration, will be converted into rental properties by selling them off in bulk to private investors.

One take on this program provides what I would consider a fair assessment of the challenges ahead, especially at local levels.  Thomas J. Fitzpatrick IV of the Federal Reserve Bank of Cleveland describes these challenges in this well researched article.  I highly recommend reading this through, but essentially Fitzpatrick covers what the REO to rental program will face in weak housing markets, specifically the Midwest.  Particularly interesting are issues of local government compliance, where code and building inspections will have to occur in greater frequency to track these rental properties.

One of the other concerns is bulk buyers and their willingness (or lack of) to stabilize these properties.  Investing into vacant homes and providing good landlord services is not a guarantee.  Reuters now reports that Fannie Mae’s strategy will in fact be bulk sales, maybe 500 to 1,000 REO properties at once.  These large sales “will saddle investors with unwanted, less attractive or unfamiliar properties,” which only compounds the situation of bulk buyers who may already not be too interested in filling vacancies at a quick enough pace for the local communities.  The Reuters article highlights in contrast to this approach Freddie Mac’s proposed strategy, where investors will be able to “cherry-pick” properties that they will find suitable for the rental conversion based upon their intimate knowledge of their local area.

Fitzpatrick offers three recommendations for the issues he raises in his article, leading to proper actions that local governments can take for markets witnessing a low demand for rental housing and/or having to deal with bulk purchasing investors who may not ‘invest’ back into the community.  And for the federal agencies involved, there should be a clear, cohesive plan developed to help both buyers and local government alike from the get go and not create differing systems of implementation.  Doing this process slower but right will be better than moving too fast on a program of a national scale.