REALTORS offer suggestions to the Fed on how to deal with the REO problem

Dennis Norman, St Louis REALTORNational Association of REALTORS® (NAR) President, Ron Phipps, wrote a letter to Shaun Donovan, Secretary of the Department of Housing and Urban Development, Timothy Geithner, Secretary of the Treasury Department and Edward DeMarco, Acting Director of the Federal Housing Finance Agency with suggestions on how to improve the Real Estate Owned (REO) asset disposition programs for Fannie Mae, Freddie Mac and FHA. NAR, like many other housing related associations and organizations, submitted letters in response to the government’s request for information on how to deal with the REO problem.

In his letter, Phipps suggests that any plan the Fed’s come up with in regards to REO’s should:

  • Focus on providing mortgage financing to qualified homebuyers and investors to increase the absorption rate of the current REO inventory and prevent increases to the existing REO inventory.
  • Expand resources dedicated to pre-foreclosure efforts, including loan modifications and short sales (foreclosures are typically more costly than loan modifications and short sales, sothis would minimize the need for more taxpayer dollars being used to support the GSEs).
  • Continue the timely and orderly disposition of REO inventory assets, and in limited geographic areas where alternatives are needed, rely on the expertise of local businessesincluding contractors, real estate brokerage firms, and professional property management companies.

Qualified home buyers need access to financing at reasonable terms:

Phipps goes on to state that the “lack of financing is putting downward pressure on home values, increasing the number of homeowners whose mortgage exceeds the value of their home, and increasing foreclosures. Since the beginning of the crisis, the GSEs (Fannie Mae and Freddie Mac) and FHA have provided about 90% of all mortgage lending. During this time, FHA has raised its insurance premiums, the GSEs have raised their upfront fees (including loan-level pricing adjustments), and the lending industry as a whole has tightened underwriting standards to the point that only those with pristine credit histories have access to reasonably priced mortgage credit.” In addressing this issue, Phipps says “increasing access to financing to qualified borrowers and investors by reassessing the higher fees and excessively tight underwriting standards will increase the availability of mortgage lending for all types of housing, and will go a long way in allowing potential homeowners and investors to absorb excess REO inventory held by the agencies.” I think this is great advice and I agree with the emphasis on qualified borrowers. Trying to make financing available to unqualified borrowers so that “everyone” could be a homeowner is part of what led to the bubble and ultimately the crash.

Investors need access to financing to help reduce REO inventory:

The lack of financing for investors was addressed by Phipps as well. It has become very difficult for even well qualified investors to obtain financing today and NAR sees investors as one solution to the REO problem and suggests implementing some temporary financing policies to open up availability of financing to local investors and offered two examples of what they are talking about:

  1. HUD should open up the FHA Section 203(k) rehabilitation program to investors. This will facilitate the rehab of the existing housing stock and increase the availability of financing for rental housing.
  2. The GSEs should temporarily suspend investor financing limitations, especially the limit on the number of mortgage loans allowed for any one investor/borrower (currently 4 for Freddie and 10 for Fannie), to enhance affordable rental opportunities.

While there are other ways to address the issue, I think the two suggestions above offered by NAR are reasonable and smart suggestions that, if implemented, could go a long way to easing the burden of REO’s on the housing market and bringing us closer to a recovery.

Current troubled borrowers need options:

Phipps’ letter stresses that, since early 2008, NAR has continually urged the lending industry to take every feasible action to keep families in their homes with a loan modification or, in cases where this isn’t possible, avoid
foreclosure through a short sale which would, not only help the struggling homeowner, but would help the lenders as well by avoiding adding to the REO inventory. To further address this, NAR is recommending that the agencies reassess their current policies to make sure that as many loan modifications and short sales are approved as possible.

NAR cites a recent Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) report noted that less than 5% of TARP funds allocated for housing support programs, such as the Home Affordable Modification Program (HAMP) and Home Affordable Foreclosure Alternatives Program (HAFA), has been
used. This is not surprising as, even though the plans sound good on paper, they still have to be carried out efficiently to work and that is something that it appears the large institutions have failed to do. Often, rather than continue to go through the red tape, frustration and time delays of these programs imposed by their lenders, many borrowers simply give up and walk away.

Selling off the REO’s in bulk is not the answer:

The agencies involved are looking at the possibility of selling off the REO inventory in massively large bulk sales. While, on the surface, that may seem to be a quick and efficient way to address the issue, Phipps, in his letter, warns that this approach will likely require taxpayers (through the agencies) to accept larger losses than are necessary. Instead, NAR has strongly suggested that “every effort should be made to incentivize individual as opposed to bulk sales since individual sales maximize recovery on the assets and minimize the impact on housing values. Selling in bulk to large national investors at deep discounts only works to further consolidate a large section of the housing market into the hands of fewer market participants. These types of proposals would allow the buyers to sell and profit from discounted inventory purchased in bulk from the agencies to the detriment of taxpayers and homeowners selling their own homes in areas where bulk home sales have depressed local home prices.

If the Fed’s insist on a bulk sale of REO’s:

Should the agencies decide to implement a pilot program for bulk sales of distressed properties, NAR is suggesting that they should first offer local investors, governments, and housing authorities, with vested interests in their communities, the opportunity to purchase the properties. Such limited sales could be made to nonprofit and for-profit entities that could meet program requirements and are familiar with the needs of the communities where the homes are located.

Lease to Own Programs:

About a week ago I wrote an article about statements made by Federal Reserve Board Governor Elizabeth Duke suggesting that a way to address the REO issue is for the lenders to lease them. Along these lines, NAR has suggested the Fed’s consider lease to own programs for the REO’s. NAR suggests that these programs should first be “focused on keeping families in their homes. Where lease-to-own programs are an appropriate solution, they should focus on the rehabilitation of blighted properties, affordable homeownership and, where it makes sense due to excess REO supply and significant rental demand, rental opportunities without an initial purchase requirement.” NAR suggests that lease to own programs:

  • Should not be run or administered by the government.
  • Should be done, whenever possible, by local investors or local non-profits that can manage the specialized needs and challenges of local markets.
  • Should be widely marketed by real estate agents to ensure visibility and encourage homeownership.
  • Should have clearly defined expectations.
  • Should have guidelines and contracts that are specific regarding maintenance, purchaser responsibility, purchase price, and percent of payment allocated towards a down payment.

When I see requests for comments from the government I’m always curious how much impact the responses have in the end on what is done. In the case of the REO problem, the government’s request has resulted in some great responses such, as this one from NAR, with some great ideas. Hopefully, in the end, we will see some of these ideas incorporated into the government’s plan for dealing with this issue.


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