Thirteen months ago, Lisa Marquis Jackson and I proposed an REO Rental solution in meetings with individuals at HUD, Fannie Mae, Freddie Mac, Treasury and Fed officials, and subsequently published our view here: Blog: Our Proposed Rental Solution. Since we spend our working lives studying housing so we can be the best advisors possible, it made sense to bring our recommendations to D.C. to help the housing recovery, and to become more integrated into the policy discussions. It worked.
Several leaders, particularly at HUD, loved the idea and have been championing Rental REO in policy circles around D.C. Regulatory and political hurdles have been inhibiting Bank and GSE leadership from seriously exploring the possibility of renting REO to maximize bank/taxpayer recovery and stabilizing home prices. In our view, this is not a matter of increased government involvement, but rather a matter of encouraging government to remove the obstacles they have created.
Last week was the deadline for submission to FHFA’s (the regulator of Fannie and Freddie) Request for Information for parties interested in participating in a program to purchase bulk REO. As regulator to Fannie and Freddie, who are and will continue to be for many years the largest REO owners in the country, FHFA is the key decision maker. I am attaching our submission, which was an educational piece trying to arm FHFA with the facts and combat the critics, which include the very powerful Realtor groups.
View our white paper here:
Here are the opening remarks:
“After extensive research, we believe that selling REO homes (homes that are owned by the lender after foreclosure) to investors makes the most economic sense for the banks, Fannie Mae, Freddie Mac, HUD, and the American taxpayers. Current regulatory and political pressures that prohibit or discourage these institutions from adopting this sound economic decision should be relaxed.
By selling REO to investment groups who will professionally manage the homes, share profits with the sellers, and operate with a few important restrictions such as limiting the number of homes that can be sold in any future year, executive decision makers at the major institutions dealing with foreclosures can help accomplish all of the following:
- Stabilize home prices
- Stabilize neighborhoods
- Improve REO asset recoveries
- Prevent rents from rising too quickly
- Remove a huge cloud hanging over the future of housing market
The most effective rental REO policy will involve a JV structure that allows experienced professionals to manage the portfolio according to free market conditions, with the only significant stipulation being that they can sell no more than 20% of the homes in any given year. The best economic recovery will be accomplished using:
- Seller-financing, which will provide the seller with solid income going forward, while also driving the buyer’s price up,
- Seller Profit and Loss Participation, similar to the successful policies utilized by the FDIC, and
- Facilitating a Market-Rate Lease Option to the Foreclosed Homeowner, eliminating the costs associated with vacancy and leasing while also providing relief to the former homeowner.
I lead an independent 30-person research firm that advises executives on the direction of the housing market. We have weighed the pros and cons of the REO policy independently, and conducted significant research, including investigating management companies, interviewing capital sources, and financial modeling. This paper summarizes our research. We are happy to provide more detail to government decision makers.”