An Assessment Of The Federal Housing Finance Agency s Real Estate Owned REO Pilot Program

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4. An Examination of The Federal Housing Finance Agency's Real Estate Owned (REO) Pilot Program


An Examination of the Federal Housing Finance Agency's Real Estate Owned (REO) Pilot Program


Statement of Meg Burns.
Senior Associate Director for Housing and Regulatory Policy.
Federal Housing Finance Agency.
Before the U.S. House of Representatives Committee on Financial Services.
Subcommittee on Capital Markets and Government Sponsored Enterprises.
May 7, 2012


Chairman Garrett and Ranking Member Waters, thank you for welcoming me here today to testify on the Federal Housing Finance Agency's (FHFA) Property Owned (REO) Initiative. I am Meg Burns, Senior Associate Director for the Office of Housing and Regulatory Policy at FHFA and I am responsible for managing this project.


As you know, FHFA regulates Fannie Mae, Freddie Mac, and the 12 Federal Mortgage Banks, which together support over $10 trillion in mortgage properties across the country. Since 2008, FHFA has also acted as the conservator to Fannie Mae and Freddie Mac (the Enterprises), a responsibility that the agency takes really seriously. In that capacity, FHFA has actually concentrated on decreasing losses to both companies through tighter underwriting requirements, more accurate pricing of danger, and aggressive loss mitigation strategies.


The full range of Enterprise loss mitigation programs are designed to keep households in their homes whenever possible, pursue options to assist households avoid foreclosure when a mortgage modification is not practical, and lastly, relocate to foreclosure expeditiously when needed. The objective of all of these efforts is to help with the stabilization of neighborhoods and communities.


My remarks today will focus on the disposition of residential or commercial properties that are conveyed to Fannie Mae and Freddie Mac through the foreclosure procedure. Today, the 2 companies own approximately 180,000 REO residential or commercial properties and approximately one-half of these residential or commercial properties are readily available for sale at any time. Preparing residential or commercial properties for sale frequently takes numerous months for a range of reasons, such as the wait period required under state redemption laws throughout which foreclosed customers may re-claim ownership rights, and time required to repair broken or overlooked residential or commercial properties.


The rate of REO sales has actually enhanced substantially over the last few months, a pattern that suggests that the excess supplies of these residential or commercial properties ought to decrease in the future. However, the number of non-performing loans-particularly badly delinquent loans-remains large. Today, the Enterprises jointly own or assurance around 1.3 million non-performing loans, the bulk of which are more than a year delinquent. A priority for FHFA and both companies is to prevent foreclosure even in these lengthy cases, through short sales, deeds-in-lieu, and deeds-for-lease.


Loss Mitigation and Current Approach to REO Disposition


Fannie Mae and Freddie Mac have been leaders in working to solve problem loans and resolve the continuous challenges in the market. Collectively, their efforts have actually made a meaningful influence on reducing foreclosures. Since conservatorship, the Enterprises have finished 1.1 million loan adjustments, more loan adjustments than foreclosures. These modifications plus all other foreclosure avoidance activities, total to some 2.2 million foreclosure avoidance actions, more than twice the number of foreclosures the Enterprises have actually completed during this exact same period.


Not every foreclosure can be prevented, however, and the REOs should be sold in a way that is most helpful for both the Enterprises and the areas where these residential or commercial properties are located. Efficiency while doing so, with conscientious repair work and sales preparation, persistent management, and aggressive marketing of the residential or commercial properties leads to the very best outcome for all. To date, both Fannie Mae and Freddie Mac have actually performed this role well. Both business rely on retail sales techniques, where residential or commercial properties are offered one at a time, frequently to purchasers who prepare to utilize the residential or commercial properties as their primary home. In 2011, roughly 65 percent of the Enterprise REOs were sold to owner-occupants. Most of these residential or commercial properties were sold within 60 days, at close to market worth.


Further, both companies offer unique sales opportunities for nonprofits and regional federal governments to acquire residential or commercial properties before they are marketed to a broader set of financier purchasers. The Enterprises' First Look programs allow residential or commercial properties to be utilized for mission-oriented community stabilization programs. During the first 15 days that a residential or commercial property is listed, both companies just think about deals from those looking for to acquire the home as their main house and public entities. Finally, for residential or commercial properties that do not sell within 6 months or so and are sufficiently focused in a specific geographical area, Fannie Mae and Freddie Mac participate in little bulk sales. The residential or commercial properties offered through these arrangements are typically lower-valued homes and are acquired by nonprofits, local federal governments, or local financiers.


Objectives of the REO-to-Rental Initiative


The REO-to-Rental Initiative complements these main disposition strategies and is intended to act as a pilot, providing an opportunity to test another model. The goals of this pilot are relatively minimal, particularly relative to public perception, so it is critically important to examine FHFA's goals:


1. Gauge investor cravings for a new asset-class-scattered website single family rental housing-as measured by the rate that financiers want to pay for a generally high-value commodity that has actually been hindered by oversupply;.

2. Determine whether the personality of residential or commercial properties wholesale, instead of one-by-one, provides a chance for well-capitalized investors to partner with regional and regional residential or commercial property management business and other community-based organizations to develop suitable economies of scale, yet supplies civic-minded techniques that can stabilize and enhance market conditions;.

3. Assess whether the design can be efficiently reproduced to make it a beneficial addition to the standard retail and small-bulk sales methods in location at the Enterprises and other banks with large inventories of residential or to sell.


I want to likewise clarify some misunderstandings about FHFA's intent and goals with this effort. The REO Initiative is highly targeted, focused only on markets that provide an opportunity to fix a basic supply-demand imbalance. This kind of intervention would be extremely improper on a national scale and the program was never ever planned to be provided nationally. The pilot markets are carefully picked, based upon obvious market characteristics-an oversupply of single household homes for sale and a strong demand for rental housing. Further, the pilot will not result in badly discounted sales. If the action from investors shows that these residential or commercial properties can not be offered at rates that are close to what Fannie Mae can make it through a retail execution, the residential or commercial properties will not be sold. While FHFA as conservator should think about the go back to the Enterprise, the firm is likewise concerned about the negative influence on the communities and local housing markets from any more depression of home worths.


The uncertainty surrounding the results of the pilot likewise caused the choice to include only Fannie Mae residential or commercial properties in the first phase of the Initiative-for a number of factors. One, Fannie Mae has more homes offered, in concentration, in the selected markets. 2, considered that the program is just a pilot, FHFA took care to think about how resources would be devoted to infrastructure and application and identified that just one business needs to expand upon existing abilities to evaluate the model. And, 3, offered the significant legal and operational obstacles connected with bundling a group of residential or commercial properties in any offered market, the choice was made to limit the scope of residential or commercial properties for sale to those from one company.


Similarly, based on the unpredictable outcomes, the pool of residential or commercial properties offered for sale in the very first deal includes a large part of homes that are already rented. Most of the occupants residing in these homes were in location when the residential or commercial properties were conveyed to Fannie Mae; the previous investor-owners lost the residential or commercial properties through foreclosure. Fannie Mae and FHFA decided to put together pools made up primarily of rental residential or commercial properties to ensure that great deals of vacant residential or commercial properties were not held off-market for the significant amount of time required to perform a sale. The sales timeline is as aggressive as it can be, but should include adequate time for the assembly of the pools, compilation and publication of property-level information, due diligence by potential buyers, evaluation of qualified financiers' plans, and the ultimate bid auction itself. Furthermore, using rental residential or commercial properties for bulk sale really assists to test one of the key goals - to figure out investor cravings for this asset class.


Another fundamental misunderstanding comes from the desire to attend to long-standing rental housing problems with this program. In reality, the REO-to-Rental Initiative was never planned as a car to increase the national supply of budget-friendly rental housing, nor to enhance the rental housing stock, through energy-efficient or "green" home enhancements. Given that the residential or commercial properties offered under this Initiative are all unique, with different structure designs and products, any effort to participate in massive upgrades would be hindered by the failure to purchase structure items in bulk and to standardize the construction process. Additionally, while the residential or commercial properties lie in general proximity to one another, the distance to travel for ongoing maintenance and management will likely be a difficulty and include costs for any property manager. The economies of scale that provide an opportunity to lower expenses in multifamily rental housing are most likely not relevant to this type of housing.


I would keep in mind that the expansion of rental housing choices in the affected communities could have an advantageous effect on cost in the surrounding rental market. These homes also provide better options for bigger families than numerous conventional multifamily rental complexes, with more bed rooms and outside area for recreational activities. And the general home improvement, which may include the installation of insulation or new, more energy efficient home appliances, might eventually add to the total improvement of the housing stock; it's just not the main objective of the program.


Current Status of the REO-to-Rental Initiative


In establishing the REO-to-Rental Initiative, FHFA welcomed a number of federal agencies with experience in asset personality and REO sales to take part in an interagency working group, evaluating info received by the original ask for info issued in August 2011 and examining alternative approaches for the pilot. The working group includes the Federal Deposit Insurance Corporation (FDIC), the Department of Housing and Urban Development, the Federal Reserve, and the Department of the Treasury, together with Fannie Mae and Freddie Mac. The interagency input has been useful and FHFA embraced a version of the FDIC technique to asset disposition for banks as a model for this pilot.


We are well into the first deal, announced in February, targeting locations that have actually been hardest struck by the housing crisis. Fannie Mae is offering approximately 2,500 residential or commercial properties, divided into eight sub-pools, located in Las Vegas, Nevada; Phoenix, Arizona; various neighborhoods in Florida; Chicago, Illinois; Riverside and Los Angeles, California; and Atlanta, Georgia. More in-depth info on the variety of residential or commercial properties in each location is available on FHFA's Real Estate Owned (REO) guide page. Immediately following the statement, interested financiers were asked to prequalify by licensing to their financial capability, appropriate market experience, and commitment to follow the deal guidelines. Those who prequalified were then eligible to send an application to take part in the auction. Evaluation of those applications is now underway.


The application process is extensive, rigorous, and demanding, needing exhaustive quantities of info and documents from the candidates and their organization partners. Only those investors who have enough capital and operational know-how will make it past the scrutiny of the customers. The monetary strength of the investors might depend on collaborations among a number of celebrations. Nonprofit financiers may work with-and take advantage of the much deeper monetary base of-institutional financiers and numerous kinds of investors can pool resources to broaden capacity and develop better execution. As discussed formerly, the intent of the Initiative is to check whether or not private capital can and will enter this brand-new asset class, providing much-needed monetary support to some of the hardest-hit housing markets.


Just as crucial, just those financiers with deep operational competence in both possession management and residential or commercial property management will make the cut. The application needs that the financiers describe 6 their previous experience handling these kinds of possessions, from marketing to renting to maintenance. How appropriate, extensive, and current that experience was will matter in the scoring.


In addition, the candidates were anticipated to detail their strategies for running a premium rental program with these particular residential or commercial properties. They were required to describe how they will count on local and local organizations to tailor their programs to meet the needs of these locals in these neighborhoods. Investors had to explain what resources they will hire to make sure that residential or commercial properties are repaired, rented rapidly, and well-kept, and to guarantee that the homeowners receive the services they require. There is an expectation that regional building and construction and repair companies will be engaged due to their familiarity with state and regional building regulations, that local residential or commercial property management firms will know the potential tenant population in the area and the finest means of marketing to these citizens, and that community-based nonprofits may offer helpful services to the homeowners. The program even requires that the new owners spend for tenants to get credit counseling at their request from a HUD-approved housing therapy firm in order to assist fix their credit and get them on more steady footing.


This strenuous application process is planned to narrow the pool of qualified bidders to those who have monetary and functional competence, but also the mission-oriented dedication to make sure that this program brings capital to markets in need in a manner that supports communities.


Currently the independent 3rd party hired to review the applications remains in the process of doing so and this process will be completed in next few weeks. After that, eligible bidders will be notified and the quote procedure will start. FHFA's objective is to finish this very first pilot deal in the next couple of months.
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To repeat, the REO-to-Rental Initiative is a pilot, a test, to see whether another personality strategy can match existing sales efforts, creating private financial investment in single household rental housing in a way that is both effective and effective at stabilizing local markets.


The pilot relies on Fannie Mae for execution, however frankly, the Enterprise part of the REO market is limited, so the future benefit of the program might be more applicable to personal monetary organizations that select to sell their stock in this manner. Further, as discussed formerly, both business will continue to depend on their existing retail sales strategies as the primary automobile for selling homes. Retail sales relocation residential or commercial properties rapidly, most frequently to households who prepare to live in the homes, and at costs that are close to market price. As part of the wider REO efforts underway, FHFA is working with both companies to enhance these retail sales methods, enhancing and expanding specialized financing programs offered for both homebuyers and little investors.
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