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

An Assessment 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 inviting 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 managing this task.

As you understand, FHFA manages Fannie Mae, Freddie Mac, and the 12 Federal Mortgage Banks, which together support over $10 trillion in mortgage possessions nationwide. Since 2008, FHFA has actually likewise acted as the conservator to Fannie Mae and Freddie Mac (the Enterprises), an obligation that the agency takes very seriously. Because capacity, FHFA has actually concentrated on lessening losses to both companies through tighter underwriting standards, more precise rates of threat, and aggressive loss mitigation methods.

The complete selection of Enterprise loss mitigation programs are created to keep families in their homes whenever possible, pursue alternatives to assist families prevent foreclosure when a mortgage modification is not feasible, and finally, move to foreclosure expeditiously when needed. The objective of all of these efforts is to assist in the stabilization of communities and communities.

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 process. Today, the 2 business own around 180,000 REO residential or commercial properties and around one-half of these residential or commercial properties are available for sale at any time. Preparing residential or commercial properties for sale typically takes numerous months for a variety of factors, such as the wait period required under state redemption laws throughout which foreclosed borrowers may re-claim ownership rights, and time required to repair damaged or disregarded residential or commercial properties.

The speed of REO sales has improved substantially over the last couple of months, a pattern that suggests that the excess supplies of these residential or commercial properties should decline in the future. However, the variety of non-performing loans-particularly badly delinquent loans-remains large. Today, the Enterprises collectively own or warranty approximately 1.3 million non-performing loans, most of which are more than a year delinquent. A concern for FHFA and both companies is to prevent 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 been leaders in working to deal with issue loans and address the ongoing obstacles in the market. Collectively, their efforts have made a significant effect on minimizing foreclosures. Since conservatorship, the Enterprises have finished 1.1 million loan adjustments, more loan adjustments than foreclosures. These adjustments plus all other foreclosure avoidance activities, total to some 2.2 million foreclosure avoidance actions, more than twice the variety of foreclosures the Enterprises have completed during this exact same duration.

Not every foreclosure can be avoided, nevertheless, and the REOs need to be offered in a manner that is most helpful for both the Enterprises and the areas where these residential or commercial properties are located. Efficiency at the same time, with conscientious repair work and sales preparation, persistent management, and aggressive marketing of the residential or commercial properties results in the very best result for all. To date, both Fannie Mae and Freddie Mac have performed this role well. Both business rely on retail sales methods, where residential or commercial properties are sold one at a time, most typically to purchasers who prepare to use the residential or commercial properties as their main residence. In 2011, around 65 percent of the Enterprise REOs were sold to owner-occupants. The majority of these residential or commercial properties were offered within 60 days, at near to market value.

Further, both business provide unique sales opportunities for nonprofits and city governments to purchase residential or commercial properties before they are marketed to a wider set of investor buyers. The Enterprises' First Look programs allow residential or commercial properties to be utilized for mission-oriented neighborhood stabilization programs. During the very first 15 days that a residential or commercial property is listed, both business just consider offers from those seeking to acquire the home as their primary home and public entities. Finally, for residential or commercial properties that do not sell within 6 months approximately and are sufficiently concentrated in a particular geographic area, Fannie Mae and Freddie Mac engage in little bulk sales. The residential or commercial properties offered through these arrangements are normally lower-valued homes and are acquired by nonprofits, local governments, or regional investors.

Objectives of the REO-to-Rental Initiative

The REO-to-Rental Initiative complements these primary disposition methods and is intended to work as a pilot, providing an opportunity to check another model. The goals of this pilot are relatively restricted, particularly relative to public perception, so it is seriously essential to review FHFA's goals:

1. Gauge financier cravings for a brand-new asset-class-scattered website single household rental housing-as determined by the cost that financiers want to spend for a generally high-value commodity that has actually been obstructed by oversupply;.

2. Determine whether the personality of residential or commercial properties wholesale, rather than one-by-one, provides an opportunity for well-capitalized investors to partner with local and regional residential or commercial property management business and other community-based organizations to create suitable economies of scale, yet supplies civic-minded approaches that can support and enhance market conditions;.

3. Assess whether the design can be efficiently replicated to make it a rewarding addition to the basic retail and small-bulk sales strategies in location at the Enterprises and other financial organizations with big stocks of residential or commercial properties to offer.


I 'd like to also clarify some misunderstandings about FHFA's intent and goals with this effort. The REO Initiative is highly targeted, focused just on markets that provide an opportunity to remedy a fundamental supply-demand imbalance. This kind of intervention would be highly improper on a nationwide scale and the program was never ever meant to be offered nationally. The pilot markets are carefully picked, based upon obvious market characteristics-an oversupply of single family homes for sale and a strong need for rental housing. Further, the pilot will not lead to severely marked down sales. If the response from investors demonstrates that these residential or commercial properties can not be sold at rates 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 should think about the return to the Enterprise, the agency is likewise concerned about the unfavorable effect on the communities and regional housing markets from any additional depression of home worths.

The uncertainty surrounding the outcomes of the pilot likewise caused the choice to include just Fannie Mae residential or commercial properties in the first stage of the Initiative-for a number of reasons. One, Fannie Mae has more homes offered, in concentration, in the selected markets. 2, considered that the program is merely a pilot, FHFA took care to think about how resources would be dedicated to facilities and application and figured out that just one company ought to expand upon existing abilities to test the model. And, 3, given the substantial legal and operational obstacles 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 business.

Similarly, based upon the uncertain outcomes, the pool of residential or commercial properties provided for sale in the first deal includes a big part of homes that are already leased. Most of the renters living 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 put together swimming pools composed primarily of rental residential or commercial properties to guarantee that large numbers of uninhabited residential or commercial properties were not held off-market for the considerable amount of time required to perform a sale. The sales timeline is as aggressive as it can be, but must include adequate time for the assembly of the pools, compilation and publication of property-level information, due diligence by potential buyers, assessment of qualified financiers' strategies, and the ultimate bid auction itself. Furthermore, providing rental residential or commercial properties for bulk sale in fact helps to test one of the crucial objectives - to identify financier appetite for this property class.

Another basic misunderstanding originates from the desire to attend to long-standing rental housing problems with this program. In reality, the REO-to-Rental Initiative was never ever planned as a car to increase the nationwide supply of economical rental housing, nor to enhance the rental housing stock, through energy-efficient or "green" home improvements. Considered that the residential or commercial properties sold under this Initiative are all special, with different structure designs and products, any effort to participate in large-scale upgrades would be hampered by the inability to buy structure items in bulk and to standardize the building procedure. Additionally, while the residential or commercial properties are located in general distance to one another, the range to travel for ongoing maintenance and management will likely be an obstacle and add costs for any possession manager. The economies of scale that supply an opportunity to reduce expenses in multifamily rental housing are most likely not applicable to this kind of housing.

I would note that the growth of rental housing options in the affected neighborhoods might have an advantageous impact on price in the surrounding rental market. These homes likewise use better alternatives for bigger households than lots of standard multifamily rental complexes, with more bed rooms and outdoor space for recreational activities. And the general home enhancement, which might include the setup of insulation or new, more energy effective appliances, might ultimately add to the overall improvement of the housing stock; it's just not the main goal of the program.

Current Status of the REO-to-Rental Initiative

In establishing the REO-to-Rental Initiative, FHFA welcomed several federal agencies with experience in asset personality and REO sales to take part in an interagency working group, examining info gotten by the initial ask for details provided in August 2011 and examining alternative methods 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, along with Fannie Mae and Freddie Mac. The interagency input has been practical and FHFA embraced a variation of the FDIC approach to asset disposition for banks as a model for this pilot.

We are well into the first transaction, announced in February, targeting locations that have 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; numerous communities in Florida; Chicago, Illinois; Riverside and Los Angeles, California; and Atlanta, Georgia. More in-depth details on the variety of residential or commercial properties in each area is offered on FHFA's Real Estate Owned (REO) primer page. Immediately following the announcement, interested financiers were asked to prequalify by certifying to their monetary capacity, pertinent market experience, and responsibility to follow the transaction rules. Those who prequalified were then eligible to submit an application to get involved in the auction. Evaluation of those applications is now underway.

The application process is detailed, extensive, and requiring, requiring extensive quantities of information and paperwork from the applicants and their business partners. Only those investors who have enough capital and functional proficiency will make it past the examination of the reviewers. The financial strength of the financiers might depend on partnerships among several celebrations. Nonprofit investors may work with-and take advantage of the much deeper financial base of-institutional investors and numerous kinds of financiers can pool resources to expand capacity and create better execution. As discussed previously, the intent of the Initiative is to test whether private capital can and will come into this brand-new possession class, supplying much-needed monetary assistance to a few of the hardest-hit housing markets.

Just as important, just those financiers with deep functional expertise in both asset management and residential or commercial property management will make it. The application requires that the investors describe 6 their previous experience handling these kinds of assets, from marketing to leasing to maintenance. How relevant, extensive, and recent that experience was will matter in the scoring.

In addition, the applicants were anticipated to detail their strategies for running a first-rate rental program with these particular residential or commercial properties. They were required to describe how they will depend on local and local companies to tailor their programs to satisfy 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, leased quickly, and well-maintained, and to ensure that the citizens get the services they require. There is an expectation that local building and construction and repair work companies will be engaged due to their familiarity with state and local building regulations, that regional residential or commercial property management companies will understand the potential occupant population in the location and the best methods of marketing to these people, and that community-based nonprofits might provide encouraging services to the locals. The program even needs that the brand-new owners pay for tenants to receive credit therapy at their request from a HUD-approved housing counseling firm in order to help fix their credit and get them on more steady footing.

This strenuous application procedure is intended to narrow the pool of qualified bidders to those who have financial and functional competence, but also the mission-oriented commitment to ensure that this program brings capital to markets in need in a method that supports communities.

Currently the independent 3rd party worked with to evaluate the applications is in the procedure of doing so and this process will be completed in next few weeks. After that, qualified bidders will be informed and the bid process will start. FHFA's objective is to complete this first pilot transaction in the next few months.

To repeat, the REO-to-Rental Initiative is a pilot, a test, to see whether another disposition strategy can complement existing sales efforts, generating private financial investment in single family rental housing in such a way that is both effective and effective at supporting regional markets.

The pilot relies on Fannie Mae for execution, but honestly, the Enterprise part of the REO market is restricted, so the future benefit of the program may be more applicable to personal financial institutions that choose to offer their inventory in this way. Further, as mentioned previously, both companies will continue to depend on their existing retail sales techniques as the main lorry for offering homes. Retail sales move residential or commercial properties quickly, usually to families who prepare to live in the homes, and at rates that are close to market price. As part of the more comprehensive REO efforts underway, FHFA is working with both companies to improve these retail sales approaches, improving and expanding specialized funding programs readily available for both property buyers and little financiers.