Mortgage servicing industry executives all have different opinions about whether the REO-to-rental strategy initiated by the Federal Housing Finance Agency will help spur any type of housing recovery.
Since the government-sponsored enterprises currently own nearly half of the nation's REO inventory that is available on the market, the FHFA recently decided to launch an initiative in which qualified investors can acquire these distressed assets in bulk and convert them into rental units for prospective tenants.
According to financial filings, at the close of the third quarter of 2011, there were over 220,000 foreclosed and REO properties being held by HUD, Fannie Mae and Freddie Mac combined.
Lewis Ranieri, an industry veteran who helped pioneer conventional mortgage-backed securities in the early 1980s, is a supporter of this rental program and believes it can be developed in most markets throughout the country. According to a research paper that Ranieri co-authored with University of California economist Kenneth Rosen called “Options for REO—Private Sector solution to the foreclosure problem”, this initiative will work best in cities that have strong rental markets as well as high volumes of REO homes.
The paper lists Chicago, Detroit, Denver, Dallas, Orlando, Minneapolis, Houston, Oakland, Phoenix and Seattle as the top ten markets to facilitate this REO-to-rental idea.
Meanwhile, even though Las Vegas has a large volume of REOs currently on the market, this metropolitan statistical area has little rental demand. In contrast, San Francisco is known for its rental market but does not have a lot of bank-owned properties. Therefore, both of these cities are poor places to invest in this REO-to-rental idea, the authors said.
“The U.S. housing market can be fixed,” Ranieri and Rosen said in the paper. “For the high level of inventory already vacant, the proposed rent-to-own program can readily absorb units, expand the availability of rental housing and set more households on the path of either stable renting or eventual homeownership.”
But for any type of rental program to be successful, the authors said tenants should not be required to pay a large downpayment when signing a lease. They said a first and last month's rent and security deposit is acceptable, but additional advance payments should not take place.
Secondly, the paper said more sources of investor finance are needed in order for the rental program to be scalable. Ranieri said Fannie and Freddie should also remove the restriction limits on the number of mortgages that investors can have because it would allow “the locals to go back to work.”
Amherst Securities Group, where prominent housing expert Laurie Goodman works as the managing director, called the FHFA's initiative “the single most important policy action that can be taken to move the housing market toward recovery.”
Another person that thinks the rental strategy is a “win-win” for all parties involved in this process is Ken Blevins, CEO of Denver-based PMH Financial, which manages REO assets for Stewart Lender Services.
According to Blevins, renting previously foreclosed homes to customers helps servicers alleviate the overhead of managing vacant REO properties and also aids in stabilizing communities that were hit hard by the mortgage crisis.
However, not everyone in the housing industry is backing this rental initiative. Jeff Frieden, CEO of Auction.com, told this publication that he is “adamantly opposed” towards any rental program of this magnitude because it has never been done before.
Frieden noted that real estate is a local issue and that it is difficult for investors to manage large portfolios of single-family homes without knowing the market these properties are located in.
“From a more macro level on what is good for the country, I think the rental program would have a diminishing amount of inventory for auction companies and Realtors and anybody involved in selling REO,” Frieden said.
Another group that has the same viewpoint as Frieden is the National Association of Realtors. NAR is urging the FHFA to proceed “cautiously” with its REO-to-rental program since housing markets are complex and varied.
“An overly aggressive REO-to-rental program that is not privately administered by local entities and does not involve substantial participation of local market experts, especially licensed real estate professionals, could be disruptive and counterproductive to communities already suffering from high foreclosure inventories and lower housing values,” NAR said.
Despite criticism about whether renting homes is the right strategy for our nation, Fannie Mae unveiled at the end of February its first REO bulk offering of 2,490 housing units in which “prequalified” investors can submit bids on the assets in this portfolio. FHFA is looking for investors that have the financial capability to acquire these assets and who have sufficient experience and knowledge in similar business matters to analyze and bear the risks of this type of investment opportunity.
Just 17% of the units in Fannie's pilot portfolio are vacant, which means investors will take control of cash flow producing, turnkey properties. The package is top-heavy with single-family homes located in Atlanta, Arizona, Los Angeles/Riverside, and different parts of Florida.
Before gaining access to information on the auction, investors must post a security deposit, and sign a confidentiality agreement. FHFA acting director Edward DeMarco called the auction an “important milestone” designed to reduce taxpayer losses and stabilize neighborhoods hard hit by the housing crisis.
Capital Economics, which supports an REO-to-rental program because it will reduce the excess supply of housing on the market, expressed disappointment that nearly 85% of the REO units to be sold in the pilot transaction are already occupied by tenants.
“The pilot plan will therefore do almost nothing to reduce the number of vacant homes for sale or provide more homes to rent,” said Paul Dales, senior U.S. economist for Capital Economics.
