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Banks Fail to Sell Distressed Homes, Get landlord Job Instead

By Broderick Perkins | April 27, 2012

Banks can rent out foreclosed homes as part of an orderly strategy to unload properties, provided the properties are safe and rented under local rules and regulations as well as federal fair housing laws. Good luck with that.

Renters? Cover your assets.

© dedMazay -

Banks have done a less than stellar job at handling foreclosures and REO sales. The National Mortgage Settlement says so. Now they get a landlording job? Whew!

To help manage the mountain of distressed properties and supply the market with what could be more affordable housing, the Federal Reserve issued an updated policy statement to guide banks in renting out foreclosed properties they hold.

In a six-page, April 5 policy statement, the Fed said banks must typically make efforts to actively market and sell real estate owned (REO) properties, but given the tight housing and credit markets "banking organizations my rent residential properties (within statutory and regulatory holding-period limits) without having to demonstrate continuous active marketing of the property."

The move is not unlike other federal agencies' efforts to turn foreclosed properties into revenue generators.

The Federal Housing Finance Agency (FHFA), in conjunction with the U.S. Department of the Treasury and U.S. Department of Housing and Urban Development (HUD), has announced a"Real Estate Owned (REO) Initiative (ROI)" to unload an estimated 200,000 REOs held by Fannie Mae, Freddie Mac (GSEs or "Government Sponsored Enterprises") and the Federal Housing Administration (FHA).

In the "Federal Reserve Policy Statement on Rental of Residential Other Real Estate Owned Properties" the Fed instructed banks to follow these and other guidelines:

• Use an operational framework to evaluate overall costs, benefits and risks of renting while taking into account property conditions, local market conditions for rental and owner-occupied housing, and the REO holder's capacity to "safely and soundly" engage in rental activity.

• Consider clear and credible approaches for the ultimate disposition of the rental property, including seller-assisted financing and rent-to-own arrangements for tenants.

The Bank of America recently announced a pilot plan to allow homeowners at risk of foreclosure to hand over deeds and sign leases that will let them rent the houses back from the bank at a market rate.

• Banks that rent must do so in compliance with all applicable federal, state, and local laws and regulations, including: landlord-tenant laws; landlord licensing or registration requirements; property maintenance standards; eviction protections (such as under the Protecting Tenants at Foreclosure Act); protections under the Servicemembers Civil Relief Act; and anti-discrimination laws, including provisions of the Fair Housing Act and the Americans with Disabilities Act.

After a recent fair housing study the National Fair Housing Alliance, on April 10, filed discrimination charges over banks' handling of foreclosed properties.

• Banks must also determine if rental activities are permitted under applicable laws and review homeowner and condominium association bylaws and local zoning laws for prohibitions against property rental. Third-party property managers should come with bank oversight to be sure they comply with these federal, state, and local laws.

• Banks with large inventories of what become rental properties should have a documented rental strategy, including formal policies and procedures for rental activities, and a documented, operational framework, down to the individual property level.

Policies and procedures should describe how the bank complies with local building codes; has adequate property insurance coverage; handles property taxes and other related obligations; and makes certain expenditures on improvements are appropriate for the property and the neighborhood.

The Fed said policies and procedures should also address risk management issues related to renting residential REO properties, including credit risk associated with tenants' potential failure to make timely rent payments; vacancies, liability and the need for legal action against tenants for delinquency, including eviction.

Again, good luck with all that.

  • 2 comments on “Banks Fail to Sell Distressed Homes, Get landlord Job Instead”

    1. Yes - nothing to it! Never mind that the folks at the bank have probably never owned a rental property and have no idea how to manage one, let alone hundreds or thousands. I think the vacancy rates on these homes will end up being a big problem for these properties.

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