The Federal Housing Finance Agency, which controls the mortgages of 75% of the nation's single-family homes, announced a pilot program to sell portfolios of foreclosed homes, with the condition that the homes be rented for “a specified number of years.”
But sales of distressed homes might not be limited to the FHFA.
“We might see banks adopt this as a template ... if it is implemented correctly,” said Matthew Bass, vice president of structured assets at AllianceBernstein, New York. He estimated around 6 million homes are either already in foreclosure or very close to it.
Last month, Bank of America announced a pilot program in which troubled homeowners would transfer their homes back to the bank in exchange for leasing their homes for up to three years for at-market or below-market rent. Eventually, the homes will be transferred to investors.
Investors see the potential. CalPERS, for example, already has exposure to the foreclosed home investment through a $500 million commitment to GI Partners III, a $1.9 billion real estate and private equity fund sponsored by GI Partners, Menlo Park, Calif.
Joseph Dear, chief investment officer of the Sacramento-based, $237.3 billion pension fund, said at a March 12 investment committee meeting that renting out single-family homes is an “interesting” tactical investment. “The belief is that if this is done at the right scale and they (money managers) develop efficiencies in processing for the sales — the short sales or the bank-owned sales — and can bring these back to market after they've been rehabbed, this should be a pretty good play,” he said.
In the meantime, before the homes are resold, the portfolio would provide an income stream for investors, Mr. Dear said. “The real returns on rental units, both apartment and houses, are pretty good on a risk-adjusted basis,” he said.
Mr. Dear declined to comment beyond what he said at the meeting
CalSTRS, West Sacramento, also invested in GI Partners III, acknowledged Ricardo Duran, spokesman for the $152.2 billion fund. CalSTRS committed $400 million to the fund in the first quarter of 2008.
So far, CalSTRS does not have any direct investments in the strategy.
“It might be something we will be looking at,” but CalSTRS has not invested in the strategy in a significant way, Mr. Duran said.
An income stream is a big draw for investors these days, said Ted Koenig, CEO of Chicago-based private equity firm Monroe Capital LLC. “The challenge is that investors are looking for yield, and private equity is not a yield business.”
Pension funds, endowments and foundations don't want to wait 10 years to reap returns from private equity funds, he said, adding they need current income now for their actuarial costs.
Driving investors into a foreclosed homes strategy are the assumptions that interest rates will rise and housing prices have hit bottom.
The housing picture has not been pretty. For the 12 months ended Jan. 31, U.S. home prices slipped 0.8%, according to the FHFA. The S&P/Case-Shiller Home Price indexes show a total housing market decline of 34.4%, measured from the June/July 2006 peak through January 2012, according to the latest data released March 27.
For investors, the business model is the same as a multifamily real estate investment trust, said AllianceBernstein's Mr. Bass. “It's an opportunity to earn that rental income. It would be a yield product like a multifamily REIT,” he said.