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The shadow market now has its first government program.

The Federal Housing Finance Agency (FHFA) rolled out the pilot phase of its Real Estate Owned (REO) Initiative in February. The program allows investors to buy foreclosed single-family properties in the nation's hardest-hit metros, with a catch—those properties must remain rentals for a certain number of years.

Fannie Mae is supplying the first round of foreclosures, offering pools of various types of assets, including homes already being rented, vacant properties, and nonperforming loans. But it's just a guinea pig to test investor interest, operational strategies, and financing structures to prove the idea out.

In all, Fannie put 2,490 properties on the block at the end of February, with the highest concentration, about 23 percent, in Atlanta, followed by Los Angeles–Riverside (19.4 percent) and southeast Florida (16.8 percent). Freddie Mac and the Federal Housing Administration (FHA) will also offer pools to investors, in subsequent phases of the program.

The program has the potential to help the still-struggling for-sale market, but it also holds the potential to make life difficult for some apartment owners. Since we're in the early innings, many questions remain unanswered. Here are five of the biggest unknowns:

1. Will It Impact the Multifamily Market?

The shadow market has always been an elusive X-factor in the apartment world, a notoriously difficult market to quantify. But with about 250,000 for-sale homes languishing on the agencies' books, apartment owners are growing a little apprehensive.

“If all of a sudden, the inventory of for-rent single-family homes goes way up, that's going to be competitive pressure for apartments in a number of markets,” says Hessam Nadji, managing director of research at Encino, Calif.–based Marcus & Millichap. “But I don't think it's a big enough factor to change the macrodynamics.”

Still, real estate is a local business. And the program may make an already bad situation worse by increasing the rental stock in areas that already have high vacancy rates. Markets such as South Florida, Atlanta, Phoenix, Las Vegas, and California's Inland Empire already felt the sting of the shadow market well before the REO-to-Rental Initiative began.

Yet, the demographics of who rents a single-family home aren't expected to threaten the apartment market all that much.

“There's a certain kind of renter who's going to want a house to rent. It might be somebody who has been foreclosed on, it might be a larger family that really needs the rooms that a house has,” says Jeff Hayward, executive vice president at Washington, D.C.–based Fannie Mae. “Our core renter is a single person 25 to 34 years old, and they're not looking to rent a house. So I think these things can peacefully coexist.”

2. How Will Investors Finance the Deals?

One of the main hurdles for investors is that buying houses in bulk is mainly an all-cash business—and there are only so many all-cash investors large enough to handle such a complex deal.

There really aren't any debt programs on the market tailored to a scattered-site deal. But that may soon change. Freddie Mac has started working on a new, “multi-site” multifamily loan, the first scattered-site commercial mortgage product that the company has ever offered.

“We are working very hard on trying to develop a multifamily mortgage product to serve the needs of large investors in single-family properties,” says David Brickman, senior vice president of multifamily at McLean, Va.–based Freddie Mac.

The program would likely be a shorter-term, lower-leverage, floating-rate execution, and only available for deals of $100 million or more. The multi-site loan program would target large, cross-collateralized pools owned and managed by a single institution.

For its part, Fannie Mae has no plans to introduce a similar product. But Freddie's program would likely be a game changer. A loan program tailored to a multi-site execution would open up the investor pool, clearing the market of more houses more quickly.

3. Who Will Buy Them?

Even before the FHFA's recent announcement, some investors were busy scooping up unsold homes and repositioning them as rentals.

Waypoint Real Estate Group recently received a $250 million initial investment from Menlo Park, Calif.–based GI Partners to purchase foreclosed single-family homes and convert them to rentals. Over the next two years, GI Partners plans to invest $1 billion in Waypoint to buy and manage new acquisitions. A natural fit for the program, the company is looking into scattered-site deals in Phoenix, Atlanta, Las Vegas, Chicago, and southern Florida.

“Geographic concentration is the most-talked-about factor,” says Doug Brien, managing director of Oakland, Calif.–based Waypoint. “We're only looking at areas with growing economies and attractive percentage yields for buying single-family property.”

But the program has its share of caveats. In a white paper, the Federal Reserve noted that some of the properties are “badly damaged, in low-demand areas, or otherwise of low value.” This certainly isn't lost on investors. Many are hoping to have the option of cherry-picking properties within each pool to help manage the scale of the investment.

It's rumored that Freddie Mac's program won't be as restrictive as Fannie's bulk-only sale, that investors would be able to use a variety of methods to purchase specific REO single-family homes within an asset pool. “I hope it's not an all-or-nothing situation,” says Brien. “Ideally, we'll be able to choose the ones we want to keep.”

4. How Do You Effectively Manage Scattered Sites?

Los Angeles–based private equity firm Oaktree Capital Management (an owner of this magazine) recently teamed up with Santa Ana, Calif.–based property manager Carrington Holding Co. in a $450 million joint venture (JV) to buy distressed homes and turn them into rentals. Carrington, incidentally, manages more than 3,000 single-family rental homes for Fannie Mae's Deed-for-Lease and Tenant-in-Place programs.

That JV offers a blueprint for success. The Initiative's most daunting aspect is the management-intensive nature of a scattered-site deal, prompting many investors to team with property management firms.

The biggest question is, how will that management challenge cut into an investor's return? “The yields in scattered single-family are still very uncertain—it could be on par with the low cap rates we're seeing, because of how management-intensive they are,” says Ben Thypin, director of market analysis at New York–based research firm Real Capital Analytics. “Figuring out how to manage scattered sites is the puzzle. Whoever can figure out how to do that properly will make a lot of money.”

5. How Will It Impact the For-Sale Market?

Injecting some health back into the single-family sector will only strengthen the metro housing market in general. But many industry watchers wonder just how effective the program can be.

Goldman Sachs recently wrote a research paper on the program, calling the possible effect “positive but modest,” with an upside of producing a 0.5 percent increase in home prices the first year, and a 1 percent increase in 2013, though “the actual effect would likely be less.”

Goldman Sachs sees some obstacles to the program's success. First, these newly converted rentals could stay vacant, which would just transfer vacancy rate increases from the for-sale to the rental market. And second, banks and other institutions could be encouraged to bring more product to the market as these pools are sold—thereby keeping the overall for-sale supply about the same.

Ultimately, though, many wonder if the program is just another way to kick the can down the road, only delaying the need for the for-sale market to take its medicine. “The percentage of investors continues to go up as a component of total home buyers. Now, we're talking about institutionalizing the process,” says Nadji. “So what happens in two or three years when home prices improve and these investors want out? There's going to be a flood of these homes thrown into the market.”

Additional reporting by Les Shaver and Derek Mearns.