PERSON OF THE WEEK: The market for real estate owned (REO) properties is undergoing a dramatic shift, and its ultimate impact is still uncertain. This week, MortgageOrb discusses the market's changes with Benton Neese, president of the board of directors of REOMAC, a trade association for the mortgage default industry.
Q: How would you categorize the state of today's REO market?
Neese: The REO market today is very fragile, although there are pockets that seem to be showing some signs of recovery. This is partly because values fell so low that they have no way to go but up.Â
One concern is that rates remain at all-time lows, which should encourage appreciation and increased activity, but the values and sales are not reacting as quickly as the industry had hoped. The REO inventory has shown some declines this year, partly because so many distressed properties that are on the market have not moved through the foreclosure process. If those properties start coming through the system at a faster rate, this could cause the REO inventory to balloon, thus making the REO market suffer.
At this point, I think there is going to be a great deal of hesitation about the market until after the fall election. There is also a ‘wait and see’ attitude in the private sector because of the problems in Europe and what impact it may have on the U.S. economy.
Q: What impact will federal REO-to-rental initiatives have on the overall state of the housing market?
Neese: This remains a large area of discussion. Traditionally, when rental units count in a neighborhood increase, the values decline, crime increases and the neighborhood deteriorates. The pride of ownership is not present; therefore, the tenants do not care about the property or the neighborhood.
There is one side of the debate that feels this will be the case. The other side feels that while traditionally, this may have been the case, this program will be handled differently and there will be pride of ownership. The renters may very well be the ultimate owners of the property.Â
With 4 million properties nationwide in distress and in danger of foreclosure, many of these people will ultimately need housing – and what a better way to provide housing to these people than to allow them to stay in their home, but as renters, with the promise of being able to purchase the home back in a few years.
If this can be done without losing the pride of ownership, not increasing crime and decreasing values in the neighborhood, then this program may be able to help the housing market. Vacant properties in a neighborhood are far worse than a rental unit in the neighborhood.
Q: Several local governments in California are considering the use of eminent domain to seize properties with underwater mortgages. Do you believe this is a good idea or a bad idea?
Neese: I think this is a bad idea. The housing industry is weak, at best, and investors are hesitant to provide funds for mortgages.
Imagine if investors are told by a city, ‘By the way, the mortgage-backed security you own is on the books at a value of $350,000, but we have a value that says it is only worth $300,000 – so we are going to take your security off your hands for $240,000 (80% of the fair market value), and you can just write off the other $110,000!’ If you then multiply that times approximately 3,165 (number of loans in the California cities of Ontario and Fontana that meet the criteria for the eminent domain program), we are looking at huge losses to the investor.Â Â
This program is also a great way to drop the value of homes – which, in turn, has a negative effect on neighborhoods. My concern with the program is that ultimately, the taxpayers have to pick up the tab for these huge losses.
Q: Where do you see the housing market heading in the next 12 months?
Neese: I really think we are starting to see a ‘pin light’ at the end of the tunnel. However, I am afraid that ‘pin light’ will not get appreciably larger until the second half of 2013, when we may see more of a ‘flashlight’ in the tunnel and finally start seeing an appreciable recovery of the housing market in 2014. Of course, the recovery may come sooner if the economy picks up stronger than predicted, but it could also take longer should the economy stumble.