With settlements in the works on the documentation problem, foreclosures are expected to pick up, said Thomas Lawler, founder of Lawler Economic & Housing Consulting, who tracks trends in government-owned foreclosures.
"You wouldn't say everything's great or wonderful," Lawler said. "There's still a substantial number of loans in the foreclosure process."
Foreclosed properties made up 22 percent of the 3.65 million homes that were for sale at the end of July, according to RealtyTrac. With about 50,000 REOs sold each month, the market has a 15-month supply, the firm said.
Buffering the broader housing market from a glut of government-owned inventory by turning them into rentals might be good for homeowners and the economy. That's not necessarily so for taxpayers, whose dollars are at risk when government- guaranteed loans go bad and who are footing the bill for maintaining the REOs.
Moreover, it remains to be seen whether converting REO to rental will work. Leasing requires money to bring properties up to code, adds to liability costs and requires an infrastructure to manage the inventory. It also delays the government's ability to recover anything from their repossessed properties, said FHA Acting Commissioner Carol Galante.
"It isn't necessarily our preference that FHA is going to itself continue to hold these properties," Galante said in an interview. "We want to move homes through the system so we can recover."
At the same time, the agency can't maximize returns if it sells too many houses at once.
"If you're putting too much through that system you are helping to drive down prices," Galante said. "If there's some siphoning off of some of that stock, it can help stabilize the prices. We could be better off. The proof will be in the pudding."