For nearly a year, housing industry executives have been pondering whether the Federal Housing Finance Agency’s decision to sell bank-owned assets in the portfolios of the government-sponsored enterprises to investors in bulk who will then be required to convert these properties into rental units will help the overall recovery effort.
At the Buying and Selling Distressed Mortgage Portfolios Conference sponsored by SourceMedia last month in New York, company leaders said during a panel that they think the REO-to-rental strategy is the future wave of the industry since most Americans, particularly young adults, do not view homeownership as a stable investment.
“The REO-to-rental is a huge opportunity from an operating standpoint to build something that is going to last for the long-term,” said Oliver Chang, the former head of U.S. housing strategy at Morgan Stanley who is now the managing director of Sylvan Road. “It’s really an opportunity to do something that historically has never been done before.”
Gary Beasley, managing director of Waypoint Real Estate Group based in Oakland, Calif, expects four to five million prospective buyers to become long-term renters. He said borrowers face many issues when they get foreclosed upon, such as repairing their credit score, which makes it difficult to purchase a home within at least five to seven years after this life-changing event.
“Today, there are different options for people to rent or buy nice houses and it all comes down to a financing decision,” Beasley said as a member of the panel. “To us, as we’ve looked at the Fannie portfolio and others, the vantage standpoint is that this bulk sale opportunity is a steal quickly.”
Chang said the biggest factor influencing the rental market is an individual’s desire not to become a homeowner, but rather their ability to be one. Before the housing crisis, credit was “loose” for a buyer to acquire a home. However, now the average credit score for a Fannie Mae and Freddie Mac mortgage is 760, he said.
By using this requirement, 65% of the country can’t qualify for a mortgage, Chang added. Therefore, these individuals have only one direction to go when it comes to finding a place to live and that is renting.
According to research conducted by Chang, over 1.7 million jobs will be created from this REO-to-rental program, with the majority being produced in construction and property management/leasing companies.
Another reason why this program has enormous upside is that blighted properties will no longer sit on the market without a homeowner occupying the property. Since many individuals across the country are currently losing their home to foreclosure, this initiative will also help address that situation and provide these homeowners with a place to reside.
“What we’re doing right now is taking vacant deteriorating properties and putting families in them. So that improves conditions by itself as somebody is sitting there,” said Rick Sharga, executive vice president at Carrington Mortgage Holdings, which has been utilizing this strategy since 2006 in 30 states. “It also takes that distressed property out of the sales inventory, which helps stabilize these values and drive all home prices to go up.”
However, there is also several risks investors face by participating in this initiative.
First, the panelists stressed that the right people have to invest their capital into this commitment because for all the billions of dollars that will be spent on purchasing single-family homes and transitioning them into rental units, millions of tenants who will be living in these properties nationwide will be affected if an investor is not satisfied with their acquisition.
Sharga said these REO homes are “valuable assets” that are being put into the hands of people who may or may not be able to have the proper infrastructure in place to handle the responsibilities affiliated with managing these units.
“If an investor maintains their properties the wrong way and eventually loses money on their investment, therefore deciding to leave the business, they have to realize that it’s not just their investment that is hurting but the people living in that house,” Chang said. “So you have to be very thoughtful in terms of how you approach this strategy and how you manage the people that live in it.”
Additionally, it is important that investors understand each asset “inside and out,” Chang said, in order to introduce a high-quality rental product to the market rather than a low quality property. Additionally, since the housing unit will be institutionally managed and not controlled by a landlord, the tenant is going to expect that any problem will be repaired immediately.
“This program has to be local and be operational. An investor has to understand what they’re getting into,” Chang continued. “You can’t just walk in, purchase everything and expect the investment to work out without any problems. From an opportunity perspective, this initiative will go through growing pains just like any other new program.”
