I personally don't believe that banks are set up to be in the rental business.  Most banks don't want to own properties.  It just show another debt on their books.  Plus property management is a pain.  When tenants don't pay the they end up in court.  I think they are better off dumping the properties with as little loss as possible.  If the strategy backfires the losses will be much greater.

Renee-

I have not heard of this strategy here in Phoenix, but it does make sense in real estate markets like Las Vegas and Phoenix.  I have been to so many investor seminars in the last 6 months, and our data is showing that by 2009, we could have a housing shortage again in Maricopa County.  With so many people moving to your market and our market each year, it really does make sense.

I just think banks will need to be careful to impliment this strategy in all markets.  Otherwise they might be in the landlording business for a long time.

Renee,

Here is what I think....In essence most of the public thinks that banks do not want to hold onto all that inventory but it just dawned on me...what if they hold a selected amount of property and rent them out and cover their carrying costs? Then when the market picks up they can recover their losses. It actually makes sense because we think it is a great time to buy so for the banks they probably figure to hold some so thy can make a profit. Just my 2 cents worth:)

Ray:  The strategy may work because of our rental situation in the valley.  If all banks wanted to "dump" immediately we would have a crisis here.

Gary:  We are set in 2009 also.  Especially if you take a good look at our building permits.  We have been pulling fewer than selling almost monthly in the last year.  Growth with jobs and incoming residents are pointing that direction.

Neal:  BINGO!  The area that I had these BPOs in where they requested a rental CMA is one of the HOTTEST rental areas that I actually am trying to carve my niche in.  We are also seeing pendings rise and inventory remain stable.  The situation definitely bears an eye on it! 

I think that makes the banks look like smart investors to hold on to properties until they can sell higher, and  not contribute to declining values.  Very interesting observation Renee!

Renee, I cannot believe that the banks in question expect to "hold" rental property. They have a problem with banking regulators and their "asset" rules. REOs are considered non-performing assets and must be "off the books" which means that they have a profound effect on the banks "capital" and hence their lending limit. So even if they have cash they can't lend it out because they need to maintain a certain ratio between loans and capital.

Maybe they have buyers for "leased up" rental properties.

Bill Roberts

Renee- I have never heard of banks holding REO's in our area.  They always keep dropping prices until they sell.  Real Estate Journals recently wrote a story stating the Mortgage Bankers Association expects real estate prices to keep dropping through 2008 and possibly into 2009.  Another report by the Chicago Mercantile Exchange says there is proof real estate values will drop as much as 20-30% in some parts of the country in 2008.  If this is true banks that hold REO's will have to hold their REO's a long time and that does not make good economic sense.

When desperation causes banks to become rental agencies, I don't call it brilliant.  I call it a way to keep the loan losses off the books for as long as possible.

Renee in my area I'm not seeing that (yet).  Frankly I think it is a great idea if they allow those with poor credit to rent.   There are so many people who have lost their homes (or are in the process of losing them) and are having such a tough time finding housing because of the foreclosure on their credit reports.  (Ok, I'm a softie, I think people deserve 2nd chances)

Maybe the banks are using this as a way to get into the Real Estate business, which is what they want.

By the way, thanks for reading and commenting on Mortgage Fraud #2: Freddy the Forger

It would make sense for the Banks to do this strictly from a profit & loss standpoint.  I agree with your perspective on this. 

Renee,

Banks renting out REOs isn't really what they want to do, but ...? Whether it'll work depends on the kind of portfolio each bank intends to rent out. And what are their projections for the market turnaround, etc. A lot of variables. It could be a long wait before the values return to where the loan balances are.

Interesting. Sounds like a management company's dream come true. Although some of the properties would probably qualify for government subsidy. Either way, value would be two fold. First, by stabilizing inventories, this props up their existing colleteral. Second, depending on how they account for the income and "future" stability of their invetory, this could bolster shareholder value.

Wow, that's an interesting thought.  I, myself, have not seen any BPOs come down with a request for rental CMAs.  Of course that does not at all mean it isn't happening.  I can see an increase of rental inventory, but I think that is necessary with the number of jobs that are about to come into the city.  With as many apartments that have turned into condos over the past few years, I believe we soon will be in need of more rental properties. 

As far as our resale inventory goes, it has been on a VERY slight decline over the past month or two.  My view on that is that we have moved into our "traditionally slow" season and less people are putting their homes on the market.  The other side of that coin is that at this moment, more loans are adjusting, property values are still declining and foreclosures are going to continue.  I think our inventory will swing back to a very slight increase after the holidays.  Now, I know Countrywide has pledged to assist homeowners who are in trouble, but I don't think they will make a huge dent in the foreclosure numbers.  My honest opinion on that deal is that they are doing it to subdue the bashing they are taking in the media. 

In any case, I agree with you on the fact that if the banks DO get into the rental business, it will alleviate some stress from the declining market and our over-saturated inventory.  But, I'm not sure how viable a solution that is.  The foreclosure process is already costly to the banks.  The banks would have to convince the investors that it would work and it would be all for nothing if the property still sat vacant.  The bank would still have a nonperforming asset and that cuts deeply into the amount they (the banks) can borrow.  That's why REOs are the lowest priced homes on the market.  They have to get those non-performing assets off their books and get their borrowing power back.

 Now I know this is getting long, and I apologize, but I just have to mention this as well.  My team and I do a number of short sales and in the past month or so, it seems that Countrywide has tightened down on short sales.  Not trying to make this a "bash Countrywide" blog, just want to share my thoughts.  It looks to me like Countrywide is not afraid to take back REOs.  They aren't afraid to go under, because who's going to let them go under?  Nobody.  Now they can puff their chest out a little and be hard-nosed on short sales.  Besides, if they are going to take a write-off, why not get a bigger write-off for their investors.  They are going to do a few thousand "restructures" (maybe in the ten-thousands) and look good in the media.  The market is going to turn and even more people will originate with Countrywide.  They have a 1 in 6 market share right now...

Coming back to the main subject...I don't think it will happen.  I'm not a fortune teller, so I could be wrong.  BTW, I'm relatively new to AR, so I'm not trying to make enemies...I really like your blogs. :)

Renee - I would have to agree.  Those of us who are sticking this out were born ready!  On one of my previous blogs I wrote "In every adversity, there is the seed of equivalent success"  I would have to change that to read "In every adversity, there is the seed of equivalent or GREATER success."  (This was said by a few different people, but I will give Napoleon Hill credit.  This is a challenging market, but if you truly have a passion for real estate and you are willing to work, you can be successful in any market.  Here's another quote that I really like, "Unless you labor, the miracle of the seed is not available to you, so labor well" - paraphrased from Jim Rohn.

You seem to have great insight in the market as well and I enjoy hearing the opinion of others.  I feel that being a student of the market is crucial to our success.

Thanks for responding on my blog.  I guess that helps my point standings?  Still learning the AR ropes.  I look forward to reading your blog and blogging with you more in the future.  And, I'm excited to see what directions our market takes!

I would say it is very brilliant! If they could rap their heads around lease options they could make thousands, but this is a step in the right direction.

Everyone should be doing what they're good at. I.e. banks should be loaning the money rather than managing the properties.

Thank you all for the remarks!  I appreciate them.  I have noticed that as pendings inch up then more properties are listed, yet the absorption will win in the next month or two.  BPOs are still asking for fair rental values :shrug:

As a small time investor, what is always heard in investment circles is that the last thing that banks want is a non-producing asset on their books. I suppose an occupied rental unit is not necessarily non-producing, but it still will get very difficult for many banks to own and operate a rental portfolio when that is not their primary job. Yes, they can hire out the management end of the business, but it's still not their bread and butter. I suppose that in a particular situation, banks might do this, but I have a hard time seeing this becoming a trend.

Just my opinion - Ken Tharp, Iowa Equity Exchange 

Ken:  I am a little behind on reading my Realtor magazines but I was reading one from a year ago and they are and have been trying to knock on the door and getting their foot in the RE end of the industry.  This perfect storm may provide that opportunity.