3 ways to build on the REO rental program

Lewis Ranieri — who’s credited as a co-inventor of the mortgage-backed security — has co-authored a new research paper supporting the federal government’s Real Estate-Owned (REO) Initiative program, according to the Wall Street Journal.

Ranieri and co-author Kenneth Rosen, a University of California economist, state that government involvement is crucial to a housing recovery and propose three ways to expand the program:

- A “rent-to-own” option that would allow tenants to eventually purchase their rental homes from the owners

- Raising the maximum number of loans that Fannie Mae and Freddie Mac can guarantee to a buyer. Currently, Fannie Mae allows 10 loans per borrower, and Freddie Mac allows four. Ranieri advocates raising that limit to 25 for those investors that make down payments of 30-35 percent.

- Changing appraisal rules for investor purchases so properties are evaluated based on rental income instead of “comparable sales.”

Addressing the current program, Ranieri and Rosen argue that its’ success hinges on Fannie Mae and Freddie Mac, as together they hold nearly 50 percent of all foreclosed properties.

They claim it will work better in some markets than others; places like Chicago, Denver, and Detroit would be better suited due to high foreclosure rates and strong apartment fundamentals. Conversely, markets like San Francisco would not be good candidates, as it has strong rental conditions but fewer bank-owned foreclosures.

They also evaluate the challenges of acquiring and managing scattered-site rental homes on the scale suggested by the program. Ranieri cites an example of former co-worker Laurie Hawkins at Salomon Brothers who now runs American Residential Properties. The company has already acquired, rehabbed and rented out 800 foreclosed properties in the Phoenix area.

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