Government holds too many distressed, foreclosed homes. Rent 'em!

If Fannie Mae and other agencies sold their more than 1 million distressed or foreclosed homes, it would glut the market. But it could rent them.

By , Guest blogger

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    A financing available by Fannie Mae sign is posted on a foreclosed property offered for sale May 31, 2011, in Los Angeles. With more than 1 million distressed and foreclosed homes, Fannie Mae and other related agencies would send prices down if they tried to sell them. But they could rent them.
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Point #1: The housing market is still glutted with excess inventory and thus remains a fat, hairy albatross around the economy’s neck (i.e., if birds can be hairy).

#2: The government, through the GSEs (Fannie and Freddie) and the Federal Housing Administration (FHA) hold a lot of mortgages.

#3: As shown in a research note today from Goldman Sachs (from the nice economists, not the nasty traders), these federally held or backed mortgages now comprise the majority of bad loans—the ones either in or heading for the foreclosure process. The first quarter of this year “marked the first quarter since 2009 that the GSEs and FHA were a combined net supplier of foreclosed properties to the market.”

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#4: So, given #1, once these properties foreclose (or even when they’re headed in that direction), can’t the gov’t do something better than dump these on the housing market!?!

Yes, and here’s what it is: RENT THEM.

The rental market is far from glutted (rents are rising even while home prices are falling). Sure, there are weeds here—FHA and the GSEs may view this type of restructuring as not being a good conservator of the taxpayers’ investment, implying that they could recover the losses on the debt by reselling the property. But as the GS folks say, “this [rental idea] could make sense from a financial perspective, given that recovery rates on distressed properties are low, rents are rising, and the rest of the GSE book of business would benefit from stabilization in home prices.”

I’m tellin’ you—I’ve got a good feeling about this idea. We should try it…quickly!

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