An Aggressive Owner Occupancy Push Can Help Restore Communities

The same old REO disposition model, multiplied across millions of REOs, threatens to convert hard-hit American neighborhoods into transient rental zones. Declining homeownership rates promise a new form of damage to communities already plagued by high vacancy rates, property abandonment, vandalism and underfunded tax rolls. Study after study links high owner occupancy rates to everything from improved educational achievement for children to decreased rates of crime. So when a neighborhood’s homeownership rate rapidly falls, the negative consequences multiply.

New Vista Asset Management responded to that threat with a unique strategy. In 2007 when the company entered the REO business as an outsider, trumpeting an approach to REO dispositions that focused on owner occupancy and community stabilization, that strategy was different from the approach of an industry built on quick sales and investor cash transactions. Our appeal for REO management practices that supported neighborhood healing through sustainable homeownership was a new call to arms.

Fast-forward to 2010 and you find that various foreclosure management strategies now echo our early calls. The administration, HUD and the GSEs have adopted first-access initiatives to help owner-occupant buyers get first crack at REOs. Nonprofit organizations have supported owner-occupant buyer auctions that give homeowners buying opportunities usually reserved for savvy investors. And a focus on supplier diversity in the broker channel has placed REO listings in the hands of the real estate professionals most likely to represent minority homebuyers.

Data suggests limited progress to date.

On the surface, these changes would appear to suggest that we’re making progress. In March 2010 the National Association of Realtors published results from a survey of U.S. households concluding that, nationwide, the percentage of homes purchased as primary residences increased between 2008 and 2009. But NAR noted that such increases were not geographically uniform and that the share of houses purchased as investments or vacation dwellings in Western U.S. states actually increased in the same period.

To track owner occupancy trends, New Vista conducts its own quarterly studies, specifically analyzing the percentage of REO properties sold to owner occupants by lenders and government entities. For the four heavily impacted Southwestern real estate markets of Clark County, Nev.; Inland Empire, Riverside and San Bernardino counties, Calif.; Los Angeles County, Calif.; and Maricopa County, Ariz.; the crisis is worsening.

Here are a few highlights from our analysis:

• The percentage of owner-occupant purchasers declined almost continuously in all analyzed Southwestern markets through 2009.

• By December 2009, owner-occupant buyers accounted for only 49.8% of residential REO purchases in Maricopa County, Arizona, down from 58.9% in January of that year.

In Clark County, owner-occupant purchases of REOs dropped 10% during the same 12-month period.
Nationwide, in the real estate markets hit hardest by the housing crisis, the story is much the same. Compared to the 2009 average percentage of REOs sold to owner occupants, the first quarter of 2010 saw alarming declines:

South East Florida, down 11.6%; Central Florida, down 8.6%; Cook County, Ill., down 6.4%; California’s Central Valley, down 7.9%; and Los Angeles down 10.6%.

Why a trend toward investors continues.

Despite attempts to provide access to owner-occupant buyers, three years into this historic foreclosure cycle, data shows that the mortgage industry still favors cash investors. Anxiety over the economy, unemployment and declining property values continue to fuel an atmosphere of urgency. Investor-driven cash purchases are faster and thus less risky for apprehensive REO sellers. The irony, of course, is that by allowing investors to outmaneuver homebuyers, we keep housing out of the hands of the very people who can play the biggest role in driving economic recovery.

Incentives need to support long-term health.

If the foreclosure crisis has taught us anything, it’s that human behavior is clearly motivated by incentives. When we overemphasize the importance of sales velocity, we drive sales for the sake of sales alone and not for the sake of broader lender and community objectives. To truly change the REO industry’s culture, we must flip performance metrics to reward sales practices that drive owner-occupancy gains. If we want to see a real shift, then brokers, REO asset managers, lenders, servicers and government agencies should all be graded on performance relative to their volume of owner-occupant sales.

Other changes would also help:

• Investors often have early knowledge about choice REOs coming to market. Lenders need to level the playing field by extending “first-look” periods from 15 to 30 days, and by forcing listing agents to immediately post all REO listings on multiple listing services.

• Investors willing to incur repair expenses often flip properties within months of a purchase, selling them at higher prices to homeowners who can fund a purchase but not a rehabilitation project. Lenders need to create fewer opportunities for quick investor profits and more opportunities for homeownership by repairing properties to conditions sufficient to qualify for lender financing.

Clearly there is more need for private sector solutions and public policies that support owner-occupancy purchases in the weakest market cities. If we want a true housing recovery, then we need to ensure that our industry practices are well aligned with the long-term health of America’s communities. Let the new barometer of our success be the resurgence of empty neighborhoods brought back to life at the hands of enthusiastic new homeowners. In this, we all gain.

Gary Acosta is the chairman of New Vista Asset Management, a San Diego-based national REO management and marketing company and the co-founder of the National Association of Hispanic Real Estate Professionals, and Jim Park is president and CEO of New Vista Asset Management.