Will the Obama administration’s upcoming plans to sell REOs in bulk to mega-investors at deep discounts siphon away hundreds of millions of dollars in commissions to real estate brokers who now sell — or assist buyers to acquire — foreclosed properties held by Fannie Mae, Freddie Mac and FHA?
Will the new approach to REO ("real estate owned") be bad news for small-scale investors who no longer will be able to compete because entire chunks of the agencies’ portfolios will be stamped "for bulk only"? Won’t this further the impression that Washington favors the fats cats on Wall Street over Mom and Pop on Main Street?
And what about the community impacts on local governments and nonprofits who want to stabilize neighborhoods by putting new owners into vacant foreclosures, rather than filling them with renters brought in by distant bulk buyers?
With the federal government now teeing up its first bulk-sale transactions — possibly within weeks — these are increasingly pressing questions. To get up to speed on what’s going on, I checked in last week with Fannie Mae, Freddie Mac, FHA and the Federal Housing Finance Agency. Here’s what I found.
There’s no question that the three have bulging inventories of REO, and that the ongoing costs associated with them are contributing to the multibillion-dollar quarterly losses racked up by Fannie and Freddie, along with the slippage in FHA’s insurance fund reserves.
However, it’s also true that all three are selling houses faster than ever, reducing their net holdings significantly:
- Fannie Mae had 162,489 homes in its REO stock as of January of this year. As of Nov. 1, that had been whittled down to 122,616. So far this calendar year, Fannie has acquired 152,440 houses through foreclosure, but it has sold 192,313. Sixty percent of those sales have been to owner-occupant buyers or nonprofits, and its recovery rate — the sale amount versus current market value of the property — is in the mid-90 percent range, according to officials.
- Freddie Mac has sold close to 80,000 REO houses in the first nine months of 2011, a record pace, and has reduced its inventory from 75,000 in the third quarter of 2010 to approximately 60,000 as of Sept. 30 of this year. Freddie says it sold 70 percent of those units to owner-occupant buyers, at an average discount to market value of just 6 percent — i.e., a 94 percent recovery rate. Freddie currently does no bulk sales.
- FHA set its all-time record this year in REO dispositions, selling 102,195 homes during fiscal 2011, which ended Sept. 30. It slashed its inventory in the process from 51,799 as of Oct. 1, 2010 to 40,634 on Sept. 30.
All three of the agencies sell primarily through networks of real estate brokers and agents. FHA’s nearly 103,000 REO sales last year generated approximately $7 million in recoveries and produced commissions to brokers of around $420 million, according to a spokesman. Fannie and Freddie could not provide commission totals, but combined it’s likely in the hundreds of millions of dollars.
Current REO disposition techniques appear to be working well — lowering inventories, yielding significant recoveries for the government, putting owners into houses and yielding significant commission dollars to the brokers, agents and ancillary service providers around the country who help make this all happen.
Which raises the question: Why mess with success? This past Aug. 10, the Treasury Department, HUD and the Federal Housing Finance Agency — which oversees Fannie and Freddie in conservatorship — issued an unusual "request for information" on how they might sell REOs faster by offering homes in giant bulk sales of $50 million to $1 billion.
The main targets: hedge funds, large institutional investment groups, and real estate companies that have the capital and the national or regional scope and management teams to purchase and handle mass conversions of REOs into rentals, thereby getting REOs off the agencies’ books much faster than is possible today.
The request produced more than 4,000 responses, which the FHFA has been analyzing for the past two months. So how’s it going and what’s the timetable?
For starters, officials speaking on background made clear that they recognize the recent efforts of Fannie, Freddie and FHA to reduce their inventories. However, said one official, the three agencies face a tsunami-sized shadow inventory that is now heading their way — a combined 1.4 million delinquent loans on their books, at least half of which, they estimate, will end up in foreclosure. Even with heroic efforts, Fannie, Freddie and FHA won’t be able to handle that level of REO volume using their current systems of individual sales, directed at owner-occupants and small investors, via realty agent networks.
It’s that looming wave that is the real focus of the bulk-sale project, officials told me, not the relatively smaller numbers currently in portfolio. On the other hand, they also recognize that flooding local markets across the U.S. with rental conversions of REO would not be productive. In fact, officials said, their approach will be to carefully select geographic areas where there is a demonstrated demand for rental units, rather than cities and neighborhoods that need more for-sale opportunities to owner-occupants.
The timetable for all this: sooner than the real estate industry might assume. Officials are looking at the possibility of starting with a bulk sale of 500 to 1,000 homes as early as next month or opting for larger transactions of up to 10,000 units during the first quarter of 2012.
Will all this cut down on future commissions for some brokers who now sell government REOs? No question. But officials emphasize that along with targeted bulk sales, the current program of individual sales to owners will continue. Of course, the more that gets sold off in bulk, the less there will be for individual sales.
Will the discounts to market value remain as high as the mid-90 percent levels when the government sells in bulk? Not a chance. Hedge funds and institutional investors want maximum discounts for their troubles. It will be up to the government officials negotiating the packages to push them hard on pricing, rental plans and management capacities.
How well they do on net recoveries — and how well they cushion the impacts on neighborhoods stemming from bulk-sale conversions to rentals and away from owner-occupancy — will no doubt be followed with intense interest by Congress and community groups. They’ll be joined, of course, by the real estate brokers whose commissions will be on the chopping block in the process.