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4. An Evaluation 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. Legislature 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 affirm on the Federal Housing Finance Agency's (FHFA) Real Estate 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 project.

As you understand, FHFA manages Fannie Mae, Freddie Mac, and the 12 Federal Mortgage Banks, which together support over $10 trillion in mortgage assets nationwide. Since 2008, FHFA has actually likewise functioned as the conservator to Fannie Mae and Freddie Mac (the Enterprises), a responsibility that the company takes very seriously. In that capability, FHFA has concentrated on decreasing losses to both business through tighter underwriting requirements, more accurate prices of danger, and aggressive loss mitigation techniques.

The full range of Enterprise loss mitigation programs are designed to keep families in their homes whenever possible, pursue alternatives to help families prevent foreclosure when a mortgage adjustment is not practical, and lastly, move to foreclosure expeditiously when needed. The objective of all of these efforts is to facilitate the stabilization of communities and areas.

My remarks today will concentrate 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 around 180,000 REO residential or commercial properties and roughly 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 a number of months for a variety of factors, such as the wait period required under state redemption laws during which foreclosed debtors might re-claim ownership rights, and time required to fix broken or overlooked residential or commercial properties.

The pace of REO sales has enhanced considerably over the last few months, a trend that recommends that the excess materials of these residential or commercial properties must decline in the future. However, the variety of non-performing loans-particularly badly overdue loans-remains large. Today, the Enterprises jointly own or guarantee approximately 1.3 million non-performing loans, most of which are more than a year delinquent. A concern for FHFA and both business is to prevent foreclosure even in these protracted 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 problem loans and attend to the continuous obstacles in the market. Collectively, their efforts have made a significant influence on lowering foreclosures. Since conservatorship, the Enterprises have finished 1.1 million loan adjustments, more loan adjustments than foreclosures. These adjustments plus all other foreclosure prevention activities, total to some 2.2 million foreclosure avoidance actions, more than twice the number of foreclosures the Enterprises have actually completed throughout this exact same duration.

Not every foreclosure can be avoided, nevertheless, and the REOs need to be offered in a way that is most helpful for both the Enterprises and the communities where these residential or commercial properties are situated. Efficiency while doing so, with conscientious repair work and sales preparation, thorough management, and aggressive marketing of the residential or commercial properties leads to the very best result for all. To date, both Fannie Mae and Freddie Mac have performed this function well. Both companies depend on retail sales strategies, where residential or commercial properties are offered one at a time, usually to buyers who plan to utilize the residential or commercial properties as their primary residence. In 2011, approximately 65 percent of the Enterprise REOs were offered to owner-occupants. Most of these residential or commercial properties were offered within 60 days, at close to market worth.

Further, both companies use special sales chances for nonprofits and city governments to purchase 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 used for mission-oriented neighborhood stabilization programs. During the first 15 days that a residential or commercial property is listed, both companies just think about offers from those seeking to purchase the home as their primary house and public entities. Finally, for residential or commercial properties that do not offer within 6 months or two and are sufficiently focused in a specific geographical location, Fannie Mae and Freddie Mac engage in little bulk sales. The residential or commercial properties offered through these plans are normally lower-valued homes and are acquired by nonprofits, city governments, or regional investors.

Objectives of the REO-to-Rental Initiative

The REO-to-Rental Initiative complements these primary disposition strategies and is intended to serve as a pilot, providing an opportunity to evaluate another design. The goals of this pilot are relatively limited, especially relative to public perception, so it is seriously essential to examine FHFA's goals:

1. Gauge financier cravings for a new asset-class-scattered website single household rental housing-as measured by the price that financiers want to pay for a traditionally high-value product that has actually been hindered by oversupply;.

2. Determine whether the personality of residential or commercial properties wholesale, instead of one-by-one, provides an opportunity for well-capitalized investors to partner with local and local residential or commercial property management business and other community-based organizations to create appropriate economies of scale, yet offers civic-minded approaches that can stabilize and improve market conditions;.

3. Assess whether the design can be effectively duplicated to make it a beneficial addition to the basic retail and small-bulk sales techniques in place at the Enterprises and other monetary institutions with large stocks of residential or commercial properties to sell.


I wish to likewise clarify some misunderstandings about FHFA's intent and objectives with this effort. The REO Initiative is extremely targeted, focused just on markets that supply an opportunity to correct an essential supply-demand imbalance. This type of intervention would be highly improper on a national scale and the program was never meant to be used nationally. The pilot markets are thoroughly selected, based on obvious market characteristics-an oversupply of single household homes for sale and a strong need for rental housing. Further, the pilot will not lead to seriously marked down sales. If the response from investors demonstrates that these residential or commercial properties can not be cost prices that are close to what Fannie Mae can survive a retail execution, the residential or commercial properties will not be offered. While FHFA as conservator need to think about the return to the Enterprise, the firm is also concerned about the unfavorable effect on the communities and regional housing markets from any more depression of home values.

The unpredictability surrounding the results of the pilot likewise led to the choice to include just Fannie Mae residential or commercial properties in the very first stage of the Initiative-for numerous reasons. One, Fannie Mae has more homes offered, in concentration, in the selected markets. 2, given that the program is just a pilot, FHFA took care to think about how resources would be dedicated to infrastructure and implementation and figured out that only one company needs to expand upon existing abilities to check the design. And, 3, provided 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 limit the scope of residential or commercial properties for sale to those from one company.

Similarly, based upon the uncertain outcomes, the pool of residential or commercial properties provided for sale in the very first transaction includes a large part of homes that are already rented. Most of the renters living in these homes remained in location 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 put together swimming pools composed primarily of rental residential or commercial properties to make sure that great deals of uninhabited residential or commercial properties were not held off-market for the substantial amount of time needed to carry out a sale. The sales timeline is as aggressive as it can be, however need to consist of sufficient time for the assembly of the pools, collection and publication of property-level details, due diligence by potential purchasers, examination of certified investors' strategies, and the ultimate bid auction itself. Furthermore, offering rental residential or commercial properties for bulk sale actually helps to test one of the key goals - to determine financier hunger for this possession class.

Another fundamental misunderstanding originates from the desire to attend to long-standing rental housing issues with this program. In reality, the REO-to-Rental Initiative was never ever meant as a vehicle to increase the national supply of budget friendly rental housing, nor to improve the rental housing stock, through energy-efficient or "green" home enhancements. Given that the residential or commercial properties sold under this Initiative are all special, with different building designs and products, any effort to participate in large-scale upgrades would be hindered by the failure to acquire building items in bulk and to standardize the building procedure. Additionally, while the residential or commercial properties lie in basic proximity to one another, the range to travel for ongoing maintenance and management will likely be an obstacle and add expenses for any asset manager. The economies of scale that provide an opportunity to lower expenses in multifamily rental housing are most likely not suitable to this type of housing.

I would note that the growth of rental housing choices in the affected neighborhoods could have a helpful impact on cost in the surrounding rental market. These homes likewise offer better options for bigger households than numerous traditional multifamily rental complexes, with more bedrooms and outdoor area for recreational activities. And the general home enhancement, which might consist of the setup of insulation or brand-new, more energy effective home appliances, might ultimately contribute to the general enhancement of the housing stock; it's just not the main objective of the program.

Current Status of the REO-to-Rental Initiative

In developing the REO-to-Rental Initiative, FHFA invited several federal agencies with experience in possession disposition and REO sales to take part in an interagency working group, reviewing info gotten by the initial demand for information issued in August 2011 and examining alternative approaches 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, in addition to Fannie Mae and Freddie Mac. The interagency input has actually been practical and FHFA adopted a version of the FDIC technique to asset personality for banks as a model for this pilot.

We are well into the first deal, revealed in February, targeting areas that have been hardest struck by the housing crisis. Fannie Mae is selling roughly 2,500 residential or commercial properties, divided into 8 sub-pools, situated in Las Vegas, Nevada; Phoenix, Arizona; different communities in Florida; Chicago, Illinois; Riverside and Los Angeles, California; and Atlanta, Georgia. More in-depth info on the number of residential or commercial properties in each place is available on FHFA's Real Estate Owned (REO) primer page. Immediately following the announcement, interested financiers were asked to prequalify by certifying to their financial capability, pertinent market experience, and commitment to follow the deal 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 detailed, extensive, and demanding, needing exhaustive amounts of information and paperwork from the applicants and their service partners. Only those financiers who have adequate capital and functional expertise will make it past the analysis of the reviewers. The financial strength of the investors might depend on partnerships among several parties. Nonprofit investors may work with-and tap into the much deeper monetary base of-institutional investors and various kinds of investors can pool resources to broaden capability and develop much better execution. As mentioned previously, the intent of the Initiative is to evaluate whether personal capital can and will enter into this brand-new asset class, providing much-needed financial backing to some of the hardest-hit housing markets.

Just as crucial, only those investors with deep operational expertise in both asset management and residential or commercial property management will make it. The application requires that the financiers explain 6 their previous experience managing these kinds of properties, from marketing to renting to maintenance. How relevant, extensive, and current that experience was will matter in the scoring.

In addition, the applicants were expected to information their prepare for operating a first-rate rental program with these specific residential or commercial properties. They were required to discuss how they will count on local and local organizations to tailor their programs to satisfy the requirements of these citizens in these communities. Investors needed to describe 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 residents get the services they need. There is an expectation that regional construction and repair companies will be engaged due to their familiarity with state and local structure codes, that local residential or commercial property management companies will know the prospective tenant population in the location and the very best methods of marketing to these residents, and that community-based nonprofits might supply encouraging services to the locals. The program even requires that the new owners spend for occupants to get credit counseling at their demand from a HUD-approved housing counseling agency in order to assist repair their credit and get them on more stable footing.

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

Currently the independent 3rd celebration employed to evaluate the applications remains in the procedure of doing so and this process will be completed in next couple of weeks. After that, qualified bidders will be informed and the quote procedure will begin. FHFA's objective is to finish this very first pilot deal in the next couple of months.

To reiterate, the REO-to-Rental Initiative is a pilot, a test, to see whether another disposition technique can match existing sales efforts, producing personal financial investment in single household rental housing in such a way that is both efficient and reliable at supporting local markets.

The pilot counts on Fannie Mae for execution, however frankly, the Enterprise part of the REO market is restricted, so the future benefit of the program may be more relevant to private banks that choose to sell their stock in this way. Further, as discussed formerly, both business will continue to depend on their existing retail sales techniques as the main vehicle for selling homes. Retail sales relocation residential or commercial properties rapidly, usually to families who plan to live in the homes, and at prices that are close to market value. As part of the wider REO efforts underway, FHFA is dealing with both companies to improve these retail sales techniques, improving and broadening specialized funding programs offered for both homebuyers and small investors.