Industry Responds to Government's Request for REO Rental Ideas

Saturday, October 8, 2011   /   by Justin Hoffmann

Industry Responds to Government's Request for REO Rental Ideas

With an estimated 250,000 foreclosed homes on Fannie Maes and Freddie Macs books, the government is considering inventive ways to divulge excess inventory and return stability to the housing market.

At the same time that this surplus of inventory is driving down home prices and dragging consumer confidence with it, another growing problem lurks in the corner drawing increasing attention. As foreclosed homeowners are forced out of their homes, the rental market becomes increasingly competitive, and the need for affordable rental housing rises.

Thus the government sent out a request for information (RFI) in August asking how a government rental program might work. The industry has responded with enthusiasm, submitting a slew of proposals now under consideration.

Suggestions include lease-to-own options, rent-and-hold, and joint profit sharing.
RadarLogic, a research and analytics firm that submitted an RFI, suggests the government engage in partnerships with property managers while retaining ownership of the property in order to ensure the government recoups some of its losses when properties appreciate in the future.

While selling homes to owner-occupants remains the most desirable option, [t]hose who want the distressed and vacant homes to be purchased by homeowners are not dealing with the reality of our current economic situation, states an RFI submitted by John Burns Real Estate Consulting. The question they should answer is: Would you rather live next to a renter or have your house value fall further.

The alternative to adopting a policy to rent out REO is to allow for continued vacancy and distressed home sales, which will contribute to falling home prices, Burns states in the RFI.

Burns also addresses a widespread concern regarding pricing on properties sold to investors. Some worry that the GSEs will sell bulk properties at a significant discount, further depressing prices rather than stabilizing the market.
However, Burns insists this will not be the case and that bidding for bulk properties will be competitive.

Like many proponents of a government rental program, Burns suggests implementing some restrictions on how or when investors may eventually sell these properties.

In particular, Burns suggests prohibiting investors from selling more than 20 percent of the homes purchased through the program in any one year.
FirstService Corporation suggested performance management and third party auditing at both the property and investor level in its RFI.

The company says providing an integrated checks and balances system will help to head off renter abuse and bring greater stabilization to the nations neighborhoods.

The National Association of Women REO Brokerages (NAWRB) suggests requiring investors to hold the property for a specified period of time before allowing them to sell the properties.

Burns also supports the idea of a lease option for foreclosed homeowners. He says, in his RFI, that such an option would save homeowners the cost and embarrassment of having to move out of their homes.

Lewis S. Ranieri, father of the mortgage-backed security and the modern mortgage market, has long supported a national rent-to-own option, according to American Banker.

According to the publication, Ranieri believes a rental program would have an immediate, positive impact on the housing market and the economy.

NAWRB supports a government rental program that provides a lease option and an option for foreclosed homeowners to rent a property after foreclosure.

Converting qualified occupants to tenants not only creates positive cash flow to maintain and market properties, but removes assets from current inventory and reduces downward pressure on home prices which often lead to strategic defaults reinforcing the foreclosure cycle, the industry group says in its RFI.

The group also warns, however, that an excess of rental properties could also yield negative returns and have potential, unintended, adverse effects.

The key to avoiding this, the RFI states, is market selection. NAWRB supports a rental program for metropolitan statistical areas with high densities of REOs.

Federal Reserve Governor Elizabeth A. Duke expresses a similar concern in a recent speech. [I]t is important to ensure that such rental conversions are executed in a responsible manner and in the best interests of renters and local communities, she states.

Whereas the RFIs deal strictly with government REOs, Duke goes a step further in suggesting that other financial institutions adopt a similar thought process and examine cases where renting their REOs might be preferable to attempting to sell them immediately.

In addition, Duke points out that a rental program may not be feasible in all markets. In particular, some properties are too damaged, or otherwise low-value, to be sold as owner-occupied units or profitably converted to rental properties.
Duke says about 5 percent of REO properties held by the GSEs and FHA have been appraised at less than $20,000. In some markets, this number is much higher, she adds.


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