With the latest data from the Case-Shiller National index showing that housing prices have fallen for the eighth straight month and are now back to January 2003 levels, the housing crisis appears no closer to its end.

But might there be an unlikely savior on the horizon for the single-family sector in the form of commercial real estate investors? On Monday, the Federal Housing Finance Agency (FHFA) announced a pilot program through which it would take bids from investors to buy foreclosed residential properties in bulk for the purpose of turning them into rentals.

The pilot program is the result of an effort launched last summer by the FHFA, along with the Treasury Department and the Department of Housing and Urban Development, to solicit outside input on how the government could deal with its millions of real estate owned (REO) residential assets and help turn the housing market around. The first pool of assets is a group of 2,490 properties, including 2,849 units in some of the hardest-hit residential markets: Atlanta, Chicago, Florida, Las Vegas, Los Angeles and Phoenix. There are 1,743 single-family homes, 527 condos, seven manufactured homes, one co-op, 118 duplexes, 36 three-unit buildings and 58 four-unit buildings.

To date, investors have purchased homes in foreclosure auctions and rented them out. But investors can only buy one or two assets at a time this way. The idea here is to enable investors to buy larger pools of foreclosed homes in order to get them on the market as rentals and deal with the glut of troubled assets more quickly.

“This is another important milestone in our initiative designed to reduce taxpayer losses, stabilize neighborhoods and home values, shift to more private management of properties and reduce the supply of REO properties in the marketplace,” FHFA Acting Director Edward J. DeMarco said in a statement.

Investors must fill out a qualifying form on the FHFA’s REO Asset Disposition page, post a security deposit and sign a confidentiality agreement to access detailed information about the properties. According to the FHFA, only investors who qualified through this process will be eligible to bid.

Initiative’s backers

The concept of involving the private sector to help solve the foreclosure problem has some high-profile backers.

Lew Ranieri, who helped pioneer mortgage-backed securities in the 1970s, and Kenneth Rosen, chairman of real estate market research firm Rosen Consulting Group, are the main authors on a policy paper issued this month laying out how the private sector’s involvement could help turn around the housing market and deliver attractive returns to investors.

“Without question, this is an opportunistic place to make investments,” Rosen says. “It’s similar to what opportunity funds have done with commercial real estate. There are more than one million units to be auctioned. Instead of having small players buy the assets, this would allow for bulk acquisitions.”

Overall, 453,266 residential units are currently classified as REO. Of those, the federal government holds nearly 50 percent of the inventory through Fannie Mae and Freddie Mac and another 9 percent with the Federal Housing Administration. In addition, private label securities hold 33.3 percent of the REO inventory and banks hold 17.5 percent.

But gaining control of those assets is a time-consuming process. In existing auctions, properties are sold one at a time. Private equity investors have gotten involved in converting vacant homes into rental properties, according to Rosen. But creating bulk programs could increase interest by making it easier for large investors to amass portfolios.

Investors then have several strategies for how to handle the assets. According to the policy paper, “Homes can be purchased for three potential outcomes, depending on a range of factors: the micro-conditions of the home, employment and income of potential tenant/owners and the macro-conditions of the neighborhood and market.” Specifically, investors could choose to offer the units in rent-to-own, rent-to-rent or resale arrangements.

In a rent-to-own scenario, an investor would enter a long-term relationship with a tenant who would offer the renter a right-of-refusal to buy the home. The lease could also be structured to give the tenant a share of any upside in a property’s sale. According to the policy paper, “This share can be structured to be payable regardless of whether or not the tenant purchases the home or be restricted to only if the tenant converts to ownership. This share can be pro-rated down or eliminated if a tenant leaves before the five-year term.”

In a rent-to-rent scenario, the investor operates the asset as a straight rental property. And a resale would simply involve moving the asset to an owner-occupier.

“The private sector has a lot of solutions to the mortgage problem,” Rosen says. “They are engaged and want to be involved. I think this is something that has to be pushed as fast as it can.”

One caveat Rosen notes is that the government needs to ensure that the participants in the program are legitimate players. For example, the policy paper notes, “Programs that we deem to be unscrupulous are requiring tenants to pay a down-payment when signing a lease. We believe first and last month’s rent and/or a security deposit in keeping with state law is acceptable, but do not believe additional advance payments are warranted.”

If all goes well, Rosen thinks the pilot program could be expanded “full scale” within a year with the government offering its inventory in bulk sales as well as banks and private-label securities conducting similar programs.