REQUIRED READING: While many people within the industry are concerned that real estate owned (REO) property repair decisions made by servicers have stymied home sales, there are also experts who believe the opposite is true.
‘I don't think a lack of repair is what's hindering the recovery of the housing market or even slowing down REO sales appreciably,’ says Rick Sharga, executive vice president at Santa Ana, Calif.-based Carrington Mortgage Holdings.
Competing against short sales and nondistressed housing stock, REOs that are below the conditions recommended by the Federal Housing Administration (FHA) account for a relatively small portion of the market, he says. Additionally, with interest rates at historic lows, home prices down substantially in most markets, and down-payment assistance becoming more available, ‘you almost can't come up with a more positive environment for a home buyer to be in,’ Sharga says.
Owner-occupant buyers are also already afforded preferential treatment in the REO segment, others say, pointing to the various ‘first look’ initiatives promoted by Fannie Mae, Freddie Mac, the FHA and many large servicers.
Such programs typically work this way: Participating sellers, in bringing their properties to market, agree to only consider offers from owner-occupant buyers within a predetermined period of time, usually 15 to 30 days. Once that first-look period closes, the properties are opened up to the broader market – investors included.
According to Brian Hurley, president and chief operating officer at San Diego-based New Vista Asset Management, the problem with these programs is that ‘the markets get wise, and with enough time, people learn how to game that system.’
At the outset of listing an REO, sellers err on the side of the highest price point, as suggested by various property valuations and home-price indices. Those sellers also hold off on price reductions for a period of time that, according to Hurley, often coincides with the first-look period. In turn, as the first-look period expires, the lender authorizes a price reduction, allowing investors to swoop in.
‘Now, the investor comes in to compete against the homeowner, and the investor gets to compete at a lower price point,’ Hurley explains.
Others question whether the owner-occupant segment of buyers even has the wherewithal to lend much more support to servicers' inventory-clearing efforts.
‘Today, we obviously have a glut of housing inventory,’ says Ivan Choi, senior vice president at Arlington, Va.-based Matt Martin Real Estate Management (MMREM). ‘You look at the unemployment rates, and they're still historically pretty high. That means there will be fewer owner-occupants available to absorb the backlog of inventory.’
Rudy Krupka, a former asset manager who now heads Windsor, Colo.-based Code Violation Services, says that although Fannie Mae and Freddie Mac will always give priority to primary homeowners, ‘oftentimes, that's not realistic because of the nature and condition of the properties themselves.’
‘The properties then become almost de facto investor-only properties, and the only way to move them through the process is through investors,’ he says.
Faced with a dearth of financing options, investors are then almost forced to become cash buyers. Krupka believes this scenario feeds into a vicious circle in which too few investors have the capital necessary to buy and fully renovate properties before returning them to the market. The mortgage industry, ever mindful of the way property flippers fueled the run-up in home prices during the boom years, remains very skittish about adopting lending policies that could be viewed as enabling speculative investors.
Reinstituting the 203(k)
Nonetheless, the Federal Housing Finance Agency's (FHFA) August 2011 request for information on REO sales appears to have reinvigorated interest, to some degree, by expanding financing options for local investor buyers. Making the FHA 203(k) rehab loan product, which helps buyers finance both the acquisition and rehabilitation of a property, available to investors is a proposal that has caught the interest of some stakeholders. The U.S. Department of Housing and Urban Development banned the product for investors in 1996 after the department's Inspector General determined the 203(k) program had been subject to fraudulent activity.
Some REO specialists say the time is right to bring the dormant 203(k) investor product back to life.
‘Now you have a market that could not be more appropriate for that type of product,’ says Sharga. ‘So put some controls on it, and get it back off the shelves.’
Sharga's not alone in that belief. In its response to the FHFA RFI, the Mortgage Bankers Association (MBA) recommended, among other recommendations, that the FHA lift the moratorium on investors' participating in the 203(k) program.
The MBA also proposed certain safeguards to prevent a recurrence of the fraud that happened in the 1990s. The MBA suggested, for example, that the FHA require a 15% to 20% down payment on investor 203(k) loans, that the loans only be made available to investors with a proven track record, and that contractors used to perform repair work be insured and bonded.
‘I think it would be good for the market if we at least leveled the playing field for individual investors and stopped treating them as if they are people who should not be invited to the party,’ Sharga says.
Although 203(k) loans are still very much available to owner-occupant buyers, MMREM's Choi says a lack of competency around the product hinders its potential in the market. Many loan officers shy away from the complications associated with 203(k) loans, he says. Furthermore, in the context of REO sales, 203(k) loans can take longer to execute than most sellers are willing to wait.
‘Typically, it's going to take 45 to 60 days, and REO sellers, because they have pressure from [mortgage-backed security] trusts on the back end, don't want to wait that long,’ Choi says.
Regardless of what comes of proposals to make 203(k) loans available to investors, Lichtenheld holds firm in his belief that the quality of the inventory is a ‘big deal.’
‘In 2012, when there's a release of inventory, I think the prices of owner-occupant-quality homes are going to actually stabilize,’ he says. ‘Looking forward, the challenge is going to be in how a client should orient its properties from a marketing standpoint so they're not just sitting ducks waiting for cash buyers.’
John Clapp is a former editor of Servicing Management.