Members of the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises were told details Monday of the Federal Housing Finance Agency's (FHFA) plan to convert owned real estate (REO) to rental property. Meg Burns, FHFA's Senior Associate Director for Housing and Regulatory Policy, told committee members that the program is aimed at some of the 180,000 REO properties owned by the two government sponsored enterprises (GSEs) Freddie Mac and Fannie Mae.
Burns said that approximately one-half of those properties are available for sale at any given time and preparing them for sale often takes several months because of state mandated redemption periods or the need for repairs. Sales of these properties has picked up over the past few months, she said, indicating that the excess supplies will decline, but there are an additional 1.3 million non-performing loans owned or guaranteed by the GSEs, the majority of which have been delinquent for over a year. Despite the many efforts of FHFA and the GSEs to resolve these delinquencies provisions must be made to handle any resulting REO in a manner that is most beneficial for both the GSEs and the neighborhoods where the properties are located.
To date the GSEs have relied on retail sales strategies, selling properties one at a time, most often to borrowers who will use them as a primary residence - the case in 65 percent of the sales in 2011. The majority of properties sell within 60 days at close to market value. Both companies have also worked to sell properties to nonprofits and local governments for mission-oriented community stabilization. When properties are not sold within six months or so the GSEs have utilized small bulk sales usually of lower-valued properties and mostly to non-profits, local governments, or regional investors.
FHFA's REO-to-Rental Initiative, Burns said, is meant to complement the primary disposition strategies used by the GSEs and is intended as a pilot. Its goals are fairly limited:
- To gauge investor appetite for scattered site single-family rental housing and their price sensitivity;
- To determine whether disposing of properties in bulk presents an opportunity for well-capitalized investors to partner with regional and local property management companies and other community organizations to create appropriate economies of scale while providing civic-minded approaches that can stabilize and improve market conditions;
- To assess whether the model can be replicated to make it a worthwhile addition to the standard retail and small-bulk sales strategies of the GSEs and other financial institutions with large inventories of REO.
Burns addressed what she said were misconceptions regarding FHFA's intent and goals for the rental pilot. First, it is highly targeted and focused only on markets that provide an opportunity to correct a fundamental supply-demand imbalance. "This type of intervention would be highly inappropriate on a national scale and the program was never intended to be offered nationally," she said. Second, the pilot will not result in severely discounted sales. If the properties cannot be sold at close to what they would bring through retail execution then they will not be sold.
Because there are so many uncertainties, the pilot is initially limited to Fannie Mae properties because of its greater concentration of homes in the selected markets and because it seemed most reasonable to expand the capabilities of only one company to executive the program and meet the significant legal and operational challenges involved.
Also because of the uncertain outcomes the first pool of properties includes a large number of properties that are already rented to tenants who were in place when the properties were conveyed to Fannie Mae. This will minimize the time that properties are held off the market and help to test one of the key objectives of the pilot - to determine investor appetite for this asset class.
Another misconception, she said, is that FHFA is using the program to address long-standing rental housing issues. It was never intended as a vehicle to increase the national supply of affordable rentals nor to improve the housing stock though energy efficient improvements. The variability of the properties make it impossible to engage in large scale upgrades as would the geographic distance between properties. While it is possible that expanding rental housing in the target communities could have a beneficial impact on price and provide better alternatives for larger families and that any improvements to individual properties could ultimately improve the overall housing stock, these are not the primary goals of the program.
FHFA invited several federal agencies with experience in asset disposition and REO sales to participate in a working group which now includes the FDIC, Departments of Housing and Urban Development and Treasury, and the Federal Reserve, as well as Fannie Mae and Freddie Mac. Their input has been helpful and FHFA adopted a version of the FDIC approach to asset disposition for banks as a model for the pilot.
The communities (Las Vegas, Phoenix, several communities in Florida, Chicago, Riverside and Los Angeles, California, and Atlanta) have been identified as have 2,500 properties. Interested investors who survived prequalification have submitted applications to participate in the auction and evaluation of those applications is now underway.
Burns stressed that the application process is demanding and rigorous and designed to insure that only those investors with sufficient capital and operational expertise will be included in the auction. Potential investors were also required to detail their plans for operating a first-rate rental program, explaining how they will involve local organizations and tailor programs to meet local needs. They had to describe what resources they will employ to make sure properties are repaired, leased quickly, and well maintained and that residents receive services as needed. The approval process should be completed in the next few weeks and FHFA's goal is to complete the first pilot transaction in the next few months.
Burse said that the future benefit of the program may ultimately prove to be more applicable to private financial institutions that choose to sell their inventory in this manner. At the same time that FHFA is moving forward on the pilot it is continuing to work with the GSEs to enhance their retail sales approaches, improving and expanding specialized financing programs available for both homebuyers and small investors.