REO Clearance Hinges On Investors

For federal housing agencies to successfully clear their inventories of real estate owned properties (REOs), private investors will need more financing options and better access to bulk portfolios of homes, Amherst Securities Group says.

The firm's latest ‘Mortgage Insight’ report homes in on the Federal Housing Finance Agency's (FHFA) request for information (RFI) on REO disposition strategies. According to Amherst, the RFI represents the government's acknowledgment of the monstrous supply-demand imbalance that is hindering recovery in the housing market. Amherst estimates that as many as 10.4 million homes will need to be liquidated over the next six years. For that to happen, upwards of 6.2 million units of demand will need to be created, Amherst says.

That means doubling the pace experienced over the past two years, when roughly 90,000 to 100,000 distressed homes have been sold each month. A key component of building that demand involves increased participation from investors.

‘Investors represent the most promising avenue to increasing demand," Amherst says. "It is very clear that policymakers need to aid the creation of a new asset class – investor-owned homes for rent. Thus far, the overwhelming majority of the rental units are in multifamily properties; that has to change.’

A successful government REO initiative must be scalable – on the order of 200 properties per transaction – and it must aim to keep distressed units off the market long enough so that home prices can stabilize. Amherst recommends federal agencies auction bulk portfolios – one per metropolitan statistical area – on an all-or-nothing basis, and the firm suggests mandating that investors hold at least 80% of their properties for at least three years.

Amherst also recommends the government consider coupling REO bulk sales with nonperforming loan sales. Intermingling the two would allow the bundling of larger groups of properties in a given geographic area, Amherst says.

Additionally, Amherst says investors must have more options for financing.

"The inability to accumulate large blocks of distressed properties in a given area is the single largest obstacle to investor participation on a larger scale," the report says. "Investor financing would serve to stimulate investor demand and further cushion home price declines."

According to Amherst, government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac could ease restrictions on the number of investment properties they finance. Moreover, the GSEs and the Federal Housing Administration could make minor tweaks to their guidelines to allow for more scattered-site transactions.

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