For the past few years, everyone involved with Bank Owned (REO) properties is aware of shadow inventory. The rational given for the shadow inventory is that the banks do not want to crash the real estate market and cause a massive jolt to the tepid economic recovery.
But the shadow inventory has not materialized and has given rise to the speculation of allowing inventories of the Federal Housing Administration to be leased to rental conversions.
Federal Reserve Bank of Boston senior economist and policy advisor Paul Willen, have indicated such a plan might not be successful. According to Willen, the number of properties in circulation may essentially be unchanged and the program will not necessarily address the oversupply problem. This source notes that the Federal Housing Finance Agency is already considering program structures that might be used if the government goes forward with an REO rental conversion plan.
Depending on how the program is structured, some small investors might have an opportuinity to participate. In our own conversations with Bank of America, they were planning on piloting a program in Arizona to rent some REOs and help home owners avoid immediate foreclosure. However, we have not heard any updates on this plan in the past 10 months.
The challenge of shadow inventory will remain with the housing market since these solutions are just kicking the can down the road and these homes will eventually become foreclosed.
Contact Us if you are intersted in buying REOs in Silicon Valley.