Turning to Tenants to Mitigate Foreclosure Losses

(Update 1 clarifies a statement by Paul Hayman.) Government-sponsored entity Fannie Mae (FNM) announced last week a rental policy it would implement for some renters living in foreclosed, Fannie-owned homes. It said it would set up property managers and brokers to collect rent on Fannie’s behalf from tenants that sign month-to-month lease contracts on rental homes and units previously owned by investors that had defaulted and foreclosed. The homes will still be listed for sale and might undergo repairs at any time the renter occupies the home. Any lease will transfer to the property’s new owner at the time of sale. A Fannie spokesperson said the program was crafted to recover some losses incurred when Fannie takes over the remaining loan balances on foreclosed rental properties. Fannie must sometimes sell these properties at steep discounts to compete in the marketplace, according to the spokesperson, and a renter occupying the property in the meantime helps Fannie to recoup the difference. It may be a temporary, interim solution, but it keeps people in housing and recovers losses. The trend seems to be catching on. FirstService Corp. (FSRV) has announced recently the collaboration of several subsidiary companies — FirstManagement Partners and Field Asset Services — to provide a management service aimed at encouraging renting out real estate-owned properties as an alternative to letting foreclosed properties sit in depreciation or pursuing a distressed sale. TenantAccess combines property management and field asset preservation to reach out to servicers and whole loan holders of foreclosed properties and offer to manage a rental or program that would run while the property is being sold. The company is also promoting a lease-to-own program as an alternative to letting an REO property sit vacant, becoming a neighborhood blight, depreciating in value and inviting vandalism and break-ins. “We will consolidate the process so that, as the property is designated [REO], we’ll analyze the property to see what the return-on-investment is for the different options — sell, lease and sell or lease and hold — and make a recommendation on what the best alternative is, given that marketplace,” said president Paul Hayman in an interview. “Then, using the client’s standard form lease, we will then go out through their broker channel and put that property onto the leasing market. Upon leasing the home, we’ll handle the entire property management processes … right through the time the lease expires or that property is sold.” On an individual basis, the specialized management services don’t appear overly necessary, but Hayman points out that on a large, nationwide scale, an investor with 1,000 or 10,000 or 50,000 properties in the rental market can consolidate property management from thousands of agents to a single company controlling the leases and property management. In that sense, Hayman said he likes to think of scattered single-family dwellings as an investor’s portfolio of assets. A vacant home will negatively affect the value of the asset and, in turn, the investor’s portfolio upon sale. But an occupied home collecting monthly rent insures a positive return on the investor’s asset and boosts the value of the portfolio. “We need alternatives to just the quick liquidation,” Hayman said. “Versus the option of selling the property at such a massive discount, [the leasing option] statistically is very strong. With the credit crunch, it’s very difficult for many people to get the down payment” required to buy a home, so renting may prove more affordable for people in need of housing, he said. FirstManagement maintains some 3,700 properties, including more than 1 million residential units in 18 states, while Field Asset Services specializes in property preservation, REO maintenance and repair, servicing more than 70,000 properties through a vendor network of some 15,000 contractors. According to Hayman, TenantAccess aims to combine these talents in service to the Southern states — primarily Florida, Texas, Arizona, Nevada and California. It was unclear at the time this story was published what kind of success rate TenantAccess has seen so far. Hayman could not provide details about what kinds of companies have expressed interest in TenantAccess’ services before publication. Write to Diana Golobay at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.