As inventories of foreclosed homes pile up, some banks and mortgage investors are turning to a new group to help lighten their load: renters.
By renting out a foreclosed home, a bank can garner some cash flow from a property and reduce the chances it will be vandalized. Further, rent-to-own agreements that give tenants the option to buy the home at a preset price offer a way to dispose of a property while bypassing the depressed market.
Though few companies are currently using the rent-to-own strategy, it could soon become widespread. Fannie Mae, the country's largest holder and guarantor of mortgages, told American Banker last week that it is considering rent-to-own agreements for its fast-growing portfolio of repossessed properties.
Steven Horne, the founder and president of Wingspan Portfolio Advisors LLC, a Carrollton, Tex., servicer of defaulted mortgages, said rent-to-own deals are "an emerging niche" in his field.
"In the past, the practice was to evict any tenant so you could sell the house," Horne said. Now, rent-to-own can be "a viable exit strategy for investors who want to cash out but can't sell. And it reduces the unsold inventory and absorption time lines by taking the properties off the market."
Fannie and Freddie Mac both have resigned themselves to becoming major landlords for the foreseeable future. In December, Fannie said it would offer monthly leases to tenants and former owners of properties it had seized, allowing them to stay in the homes if they pay rent. Freddie announced a similar policy last week.
But Fannie may take things a step further. Amy Bonitatibus, a spokeswoman for the government-sponsored enterprise, said last week that it "is considering different rent-to-own options." She did not provide further details.
According to its 2008 annual report, Fannie owned 63,538 foreclosed homes at yearend, almost twice as many as a year earlier.
Freddie said last week that it has no plans to offer rent-to-own options. Its inventory of foreclosed homes more than doubled, to 28,089, on Sept. 30 (the most recent date for which it has disclosed figures) from a year earlier.
"The banks are taking back a lot of properties, so they're starting rent-to-own programs in order to generate revenue," said Travis Hamel Olsen, the chief operating officer of Loan Resolution Corp., a Scottsdale, Ariz., manager of properties headed for foreclosure.
"It is important that these properties not sit vacant, because they deteriorate," he said. "If people are living in them and paying rent, some money coming in the door is better than nothing."
However, he said, there are headaches in store for banks that become landlords: "Who's going to manage the renters and fix the kitchen sink when it breaks?"
John Kobs is the founder and chief executive of iRentToOwn Corp., which runs a Web site listing rent-to-own properties in Los Angeles, Sacramento and Riverside, Calif. He said rent-to-own options make up less than 1% of overall home sales. There is no national Web site or official list of rent-to-own properties, he said.
"The main reason there isn't widespread adoption of the rent-to-own concept is that the deals are not easy to do," he said. "At the end of the lease, there's a huge risk that the home won't appraise at the" predetermined price, and the tenant can't finance the purchase.
This problem has scuttled many rent-to-own deals offered by homeowners who owed more than the houses were worth, Kobs said. "A ton of people want to sell, but they aren't all in a position to sell because they're underwater."
In addition, the field of potential renters may be limited to people with poor credit, those who are relocating and those who prefer to live in a home and "test-drive it" before buying, he said.
However, some observers said the rent-to-own agreement could become a gateway to homeownership — one that better prepares people for such responsibility than the subprime market did.
Horne said some investors are considering offering "silent second" liens or "participating interest" loans as part of rent-to-own agreements, whereby a portion of the purchase price is repaid only when the property is resold.
"It's a way to get a tenant to own at a payment they can afford while protecting the lender's position down the road," he said. "The goal is to get the title to the property off their books."