What to Do with 3 Million REOs?

A hot topic in Washington, D.C. this month is what to do with 3 million REOs currently in holding by the Federal Housing and Finance Agency. The popular answer is to make the government agency the largest landlord in America.
Does this help or hurt the investor market and, more importantly, the recovery of the real estate market in general? Or does it just prolong the inevitable?
Federal Reserve Chairman Ben Bernanke supports the national REO rental program saying in a white paper to Congress on this issue that “although small investors are currently buying and converting foreclosed properties to rental units on a limited scale, larger-scale conversions have not occurred.”
He points to three reasons this has not occurred –

Grouping properties geographically has proven difficult and because of this it’s hard to streamline fixed costs
Financing is hard to obtain and the REO holders are losing money in bulk sales
Regulators have “generally encouraged sales of REO property as early as practicable.”

But what happens when the government becomes landlord in chief?
Bernanke says that that because Fannie Mae, Freddie Mac and the FHA are currently holding half of the REO inventory, they “might be able to aggregate enough properties to facilitate a cost-effective rental program in many rental markets.”
Does this just prolong the issue of loss to help the market recover?
The white paper states, “Preliminary estimates suggest that about two-fifths of Fannie Mae’s REO inventory would have a cap rate above 8 percent–sufficiently high to indicate renting the property might deliver a better loss recovery than selling the property.”
That statement doesn’t tell us anything about how long this program will last. It doesn’t tell us the costs involved. Nor, does it tell us what effect this will have on the overall economy.
Sure, more renters will have places to live. But this doesn’t answer the long-term question. And the analysts firms disagree on what’s best, according to today’s HousingWire recap of the topic at the American Securitization Forum.
In Jacob Gafney’s report, Laurie Goodman, a managing director with Amherst Securities said this program “would result in a cottage industry devoted to third-party management of these properties.”
Barclays analysts disagreed and said the program “remains difficult to scale effectively and may not draw as much money as envisioned.”
So what does the white paper say about the success of the program?

It offers several scenarios for how the program could work, but they also say “no such program currently exists, predicting its success of efficacy is difficult. Ongoing experimentation and analysis will be a crucial component of developing such a program.”
Most of the properties held by Fannie Mae by “would have a cap rate above 8 percent.” This indicates that “renting the property might deliver a better loss recovery than selling the property.

Read the full post here…