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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 are accountable for handling this task.

As you understand, FHFA controls 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 actually likewise functioned as the conservator to Fannie Mae and Freddie Mac (the Enterprises), an obligation that the firm takes really seriously. In that capacity, FHFA has concentrated on minimizing losses to both business through tighter underwriting requirements, more precise pricing of danger, and aggressive loss mitigation strategies.

The full array of Enterprise loss mitigation programs are designed to keep families in their homes whenever possible, pursue alternatives to help households avoid foreclosure when a mortgage modification is not feasible, and finally, move to foreclosure expeditiously when required. The goal of all of these efforts is to facilitate the stabilization of communities and neighborhoods.

My remarks today will focus on the personality 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 roughly half of these residential or commercial properties are available for sale at any time. Preparing residential or commercial properties for sale frequently takes a number of months for a range of reasons, such as the wait period needed under state redemption laws during which foreclosed debtors might re-claim ownership rights, and time required to fix damaged or neglected residential or commercial properties.

The speed of REO sales has actually enhanced considerably over the last few months, a trend that recommends that the excess materials of these residential or commercial properties should decrease in the future. However, the number of non-performing loans-particularly seriously overdue loans-remains large. Today, the Enterprises jointly own or guarantee roughly 1.3 million non-performing loans, most of which are more than a year delinquent. A priority for FHFA and both business is to avoid foreclosure even in these drawn-out 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 actually been leaders in working to solve issue loans and resolve the continuous challenges in the market. Collectively, their efforts have actually made a significant effect on lowering foreclosures. Since conservatorship, the Enterprises have completed 1.1 million loan adjustments, more loan modifications than foreclosures. These adjustments plus all other foreclosure avoidance activities, total to some 2.2 million foreclosure prevention actions, more than twice the number of foreclosures the Enterprises have finished throughout this exact same duration.

Not every foreclosure can be avoided, however, and the REOs must be sold in a manner that is most advantageous for both the Enterprises and the neighborhoods where these residential or commercial properties are located. Efficiency in the process, with diligent repair work and sales preparation, thorough management, and aggressive marketing of the residential or commercial properties results in the very best outcome for all. To date, both Fannie Mae and Freddie Mac have performed this function well. Both companies depend on retail sales techniques, where residential or commercial properties are sold one at a time, frequently to purchasers who plan to use the residential or commercial properties as their main house. In 2011, around 65 percent of the Enterprise REOs were offered to owner-occupants. The bulk of these residential or commercial properties were offered within 60 days, at near to market price.

Further, both business offer unique sales chances for nonprofits and regional federal governments to acquire residential or commercial properties before they are marketed to a broader set of financier buyers. The Enterprises' First Look programs permit residential or commercial properties to be utilized for mission-oriented neighborhood stabilization programs. During the first 15 days that a residential or commercial property is noted, both business only consider deals from those looking for to purchase the home as their primary home and public entities. Finally, for residential or commercial properties that do not offer within 6 months or two and are sufficiently focused in a particular geographical location, Fannie Mae and Freddie Mac take part in little bulk sales. The residential or commercial properties offered through these plans are normally lower-valued homes and are bought by nonprofits, city governments, or regional investors.

Objectives of the REO-to-Rental Initiative

The REO-to-Rental Initiative matches these primary disposition methods and is meant to work as a pilot, supplying a chance to check another model. The objectives of this pilot are relatively limited, particularly relative to public understanding, so it is seriously essential to evaluate FHFA's objectives:

1. Gauge investor appetite for a brand-new asset-class-scattered site single family rental housing-as measured by the cost that financiers want to pay for a traditionally high-value product that has been hampered by oversupply;.

2. Determine whether the personality of residential or commercial properties wholesale, as opposed to one-by-one, presents an opportunity for well-capitalized investors to partner with local and local residential or commercial property management business and other community-based companies to produce suitable economies of scale, yet offers civic-minded techniques that can support and improve market conditions;.

3. Assess whether the model can be efficiently replicated to make it a rewarding addition to the basic retail and small-bulk sales techniques in location at the Enterprises and other monetary institutions with big inventories of residential or commercial properties to sell.


I want to likewise clarify some mistaken beliefs about FHFA's intent and goals with this effort. The REO Initiative is extremely targeted, focused only on markets that supply an opportunity to correct a fundamental supply-demand imbalance. This type of intervention would be highly inappropriate on a nationwide scale and the program was never ever planned to be provided nationally. The pilot markets are thoroughly 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 seriously discounted sales. If the action from financiers shows that these residential or commercial properties can not be sold at prices 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 must consider the go back to the Enterprise, the agency is also concerned about the unfavorable impact on the communities and regional housing markets from any further anxiety of home worths.

The unpredictability surrounding the outcomes of the pilot likewise led to the choice to involve only Fannie Mae residential or commercial properties in the very first stage of the Initiative-for numerous reasons. One, Fannie Mae has more homes readily available, in concentration, in the picked markets. 2, considered that the program is just a pilot, FHFA was careful to think about how resources would be dedicated to facilities and execution and determined that just one business needs to expand upon existing abilities to check the design. And, 3, given the substantial legal and functional difficulties connected with bundling a group of residential or commercial properties in any given market, the decision was made to restrict the scope of residential or commercial properties for sale to those from one business.

Similarly, based upon the uncertain outcomes, the swimming pool of residential or commercial properties provided for sale in the very first deal consists of a large part of homes that are already rented. Most of the occupants residing in these homes remained in place when the residential or commercial properties were conveyed to Fannie Mae; the former investor-owners lost the residential or commercial properties through foreclosure. Fannie Mae and FHFA decided to assemble pools made up mainly of rental residential or commercial properties to ensure that great deals of vacant residential or commercial properties were not held off-market for the considerable amount of time required to carry out a sale. The sales timeline is as aggressive as it can be, however need to consist of adequate time for the assembly of the pools, collection and publication of property-level info, due diligence by prospective purchasers, assessment of qualified investors' strategies, and the supreme quote auction itself. Furthermore, offering rental residential or commercial properties for bulk sale in fact helps to evaluate one of the essential objectives - to identify financier hunger for this possession class.

Another essential misunderstanding originates from the desire to attend to long-standing rental housing problems with this program. In truth, the REO-to-Rental Initiative was never intended as a lorry to increase the nationwide supply of budget friendly rental housing, nor to improve the rental housing stock, through energy-efficient or "green" home improvements. Given that the residential or commercial properties offered under this Initiative are all special, with various building styles and products, any effort to engage in massive upgrades would be hampered by the failure to purchase building products in bulk and to standardize the building procedure. Additionally, while the residential or commercial properties are located in general distance to one another, the distance to take a trip for continuous upkeep and management will likely be a challenge and include expenses for any asset manager. The economies of scale that supply a chance to decrease expenses in multifamily rental housing are most likely not applicable to this kind of housing.

I would keep in mind that the expansion of rental housing choices in the impacted neighborhoods could have an advantageous effect on rate in the surrounding rental market. These homes likewise use much better options for larger families than lots of standard multifamily rental complexes, with more bedrooms and outdoor area for leisure activities. And the basic home improvement, which might consist of the installation of insulation or new, more energy efficient appliances, might eventually add to the general enhancement of the housing stock; it's simply not the primary goal of the program.

Current Status of the REO-to-Rental Initiative

In developing the REO-to-Rental Initiative, FHFA welcomed a number of federal firms with experience in property personality and REO sales to participate in an interagency working group, evaluating details gotten by the original request for info provided in August 2011 and evaluating alternative methods for the pilot. The working group consists of the Federal Deposit Insurance Corporation (FDIC), the Department of Housing and Urban Development, the Federal Reserve, and the Department of the Treasury, along with Fannie Mae and Freddie Mac. The interagency input has been valuable and FHFA embraced a variation of the FDIC method to asset personality for banks as a model for this pilot.

We are well into the very first deal, revealed in February, targeting locations that have been hardest struck by the housing crisis. Fannie Mae is offering around 2,500 residential or commercial properties, divided into 8 sub-pools, located in Las Vegas, Nevada; Phoenix, Arizona; different communities in Florida; Chicago, Illinois; Riverside and Los Angeles, California; and Atlanta, Georgia. More comprehensive info on the variety of residential or commercial properties in each location is readily available on FHFA's Real Estate Owned (REO) primer page. Immediately following the announcement, interested investors were asked to prequalify by certifying to their monetary capability, relevant market experience, and responsibility to follow the transaction guidelines. Those who prequalified were then eligible to submit an application to take part in the auction. Evaluation of those applications is now underway.

The application procedure is extensive, strenuous, and demanding, requiring exhaustive quantities of details and documentation from the candidates and their service partners. Only those financiers who have sufficient capital and operational expertise will make it past the analysis of the customers. The financial strength of the financiers might depend on partnerships amongst several celebrations. Nonprofit investors may work with-and take advantage of the deeper monetary base of-institutional financiers and various types of investors can pool resources to expand capability and develop better execution. As discussed previously, the intent of the Initiative is to evaluate whether or not private capital can and will enter this new possession class, supplying much-needed financial assistance to some of the hardest-hit housing markets.

Just as essential, only those investors with deep functional expertise in both property management and residential or commercial property management will make it. The application requires that the investors describe 6 their previous experience managing these kinds of properties, from marketing to renting to maintenance. How appropriate, substantial, and recent that experience was will matter in the scoring.

In addition, the candidates were expected to detail their plans for operating a premium rental program with these specific residential or commercial properties. They were required to discuss how they will count on regional and regional companies to tailor their programs to fulfill the requirements of these citizens in these communities. Investors had to explain what resources they will hire to guarantee that residential or commercial properties are fixed, leased quickly, and well-maintained, and to ensure that the homeowners receive the services they need. There is an expectation that local building and repair companies will be engaged due to their familiarity with state and local building regulations, that regional residential or commercial property management firms will know the prospective tenant population in the area and the finest means of marketing to these residents, which community-based nonprofits might supply helpful services to the citizens. The program even needs that the brand-new owners spend for tenants to receive credit counseling at their request from a HUD-approved housing counseling firm in order to help fix their credit and get them on more stable footing.

This extensive application procedure is planned to narrow the swimming pool of eligible bidders to those who have financial and functional proficiency, but likewise the mission-oriented commitment to guarantee that this program brings capital to markets in requirement in such a way that supports neighborhoods.

Currently the independent 3rd party hired to review the applications remains in the process of doing so and this procedure will be completed in next couple of weeks. After that, qualified bidders will be notified and the quote process will begin. FHFA's goal is to complete this very first pilot transaction in the next couple of months.

To reiterate, the REO-to-Rental Initiative is a pilot, a test, to see whether another personality method can match existing sales efforts, creating private investment in single family rental housing in a manner that is both effective and efficient at stabilizing local markets.

The pilot relies on Fannie Mae for execution, but frankly, the Enterprise portion of the REO market is limited, so the future benefit of the program might be more appropriate to personal monetary organizations that select to sell their inventory in this way. Further, as pointed out formerly, both companies will continue to depend on their existing retail sales techniques as the primary lorry for offering homes. Retail sales move residential or commercial properties rapidly, frequently to families who plan to reside in the homes, and at rates that are close to market price. As part of the wider REO efforts underway, FHFA is working with both companies to boost these retail sales approaches, improving and broadening specialized financing programs offered for both property buyers and little financiers.