Feds want foreclosures sold in bulk to be rentals

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Feds want foreclosures sold in bulk to be rentals

by Catherine Reagor, columnist - Aug. 24, 2011 12:00 AM
The Arizona Republic

The federal government would like to sell some of its huge portfolio of foreclosure homes to investors who will rent them out.

These are houses with loans backed by Fannie Mae, Freddie Mac and the Federal Housing Administration that lenders and investors have foreclosed on and handed back to these federally owned agencies to take the losses on.

Last week, the U.S. Treasury Department and U.S. Department of Housing and Urban Development requested proposals from groups to buy the homes and turn them into rentals. The federal agencies didn't mention a discount for buying the houses in bulk, but most investors will expect one.

The federal agencies say they want to pool the homes in portfolios, because the houses are selling too slowly on an individual basis.

What happened to the federal housing plan to help people modify their mortgages and keep their homes instead of losing them to foreclosure? An investor renting out the property likely will pay much less than what was owed on the mortgage.

Arizona is one of several states that received federal money last year to help homeowners modify their loans and keep their houses. Part of the deal with the $268 million Arizona received is that lenders have to match principal reductions for a loan modification to work. For example, homeowners eligible for a loan modification from the Arizona Housing Department can receive up to $50,000 in federal funds to reduce their principal. But the lender must agree to provide matching funds. So a metro Phoenix homeowner facing foreclosure who owes $250,000 on a house valued at $175,000 could have the mortgage knocked down to $150,000 and not only be able to afford the monthly payment but be enticed to stay in the house because the homeowner owes less.

But here's the big glitch in the program: Neither Fannie Mae or Freddie Mac, which were taken over by the government during the housing crash, will agree to loan modifications that include principal reductions.

The Arizona Housing Department has been working with Bank of America and other lenders trying to spend its money to help homeowners with loan modifications. But Fannie Mae and Freddie Mac, which own a lot of the state's mortgages in foreclosure, have refused to participate in the principal-reduction program approved by the Treasury Department.

Reginald Givens of the Arizona Housing Department said the recent creative response by Fannie Mae and Freddie Mac to excessive foreclosures "gives us hope that in time, similar creativity will be applied to the handling of their delinquent loans leading to principal-reduction mortgage modifications."

The Housing Department started taking applications for its federally backed loan-modification program that involves principal reductions in September 2010. So far, the state agency has completed five modifications. BofA, which earlier this year committed to working more closely with Arizona on its principal-reduction loan program, hasn't completed one of the deals in Arizona.

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