Bulk REO Sales From Fannie and Freddie

The Obama administration's upcoming plans to sell REOs in bulk to mega-investors at deep discounts will siphon away hundreds of millions of dollars from real estate brokers and service providers that now assist buyers in acquiring foreclosed properties held by Fannie Mae, Freddie Mac and FHA. Bulk REO Sales

This new approach to REO or bank owned properties could be bad news for small-scale investors who no longer will be able to compete because entire chunks of the agencies' portfolios could be stamped "for bulk only". Doesn’t this seem like more of Washington favoring the fats cats on Wall Street over Mom and Pop on Main Street?

And what about the community impacts on local governments and nonprofits who want to stabilize neighborhoods by putting new owners into vacant foreclosures, rather than filling them with renters brought in by massive property management companies and institutional investors and funds?

With the federal government now teeing up its first bulk-sale transactions, possibly within weeks, questions from Realtors, service providers and community groups are mounting.

There's no question that the three agencies have bulging inventories of REO properties, and that the ongoing costs associated with them are contributing to the multi-billion dollar quarterly losses racked up by Fannie and Freddie, along with the huge drop in FHA's insurance fund reserves used to create FHA loans.

However, it's also true that all three are selling houses faster than ever, reducing their net holdings and costs significantly:

Fannie Mae had 162,489 homes in its REO stock as of January of this year. As of Nov. 1, that had been whittled down to 122,616. So far this calendar year, Fannie has acquired 152,440 houses through foreclosure, but it has sold 192,313. Sixty percent of those sales have been to owner-occupant buyers or nonprofits, and its recovery rate -- the sale amount versus current market value of the property -- is in the mid-90 percent range, according to officials.

Freddie Mac sold close to 80,000 REO houses in the first nine months of 2011, a record pace, and has reduced its inventory from 75,000 in the third quarter of 2010 to approximately 60,000 as of Sept. 30 of this year. Freddie says it sold 70 percent of those units to owner-occupant buyers, at an average discount to market value of just 6 percent or a 94 percent recovery rate. Freddie Mac currently does no bulk sales.

All three of the agencies sell primarily through networks of real estate brokers and agents. FHA's nearly 103,000 REO sales last year generated approximately $7 billion in recoveries and produced commissions to brokers of around $420 million. Fannie and Freddie could not provide commission totals, but between the two it has to be well into the hundreds of millions of dollars nationwide.

The current REO disposition techniques appear to be working very well, lowering inventories, yielding significant recoveries for the government (90-93% of value), putting owners into houses, and yielding much needed income to the brokers, agents and ancillary service providers around the country like mortgage brokers, appraisers, inspectors, surveyors, etc., who help make this all happen.

Why Change the System?

For starters, officials made clear that they recognize that Fannie Mae, Freddie Fannie Mae and Freddie Mac Mac and FHA have taken huge strides to reduce their inventories, but the three agencies face a tsunami-sized shadow inventory that is now heading their way. All totaled a combined 1.4 million delinquent loans sit on their books, at least half of which, they think, will end up in foreclosure. Even with heroic efforts, Fannie, Freddie and FHA won't be able to handle that level of REO volume using their current systems of individual sales, directed at owner-occupants and small investors, via real estate brokerage firms.

It's that looming wave that is the real focus of the bulk-sale project, not the relatively smaller numbers currently in portfolio. On the other hand, they also recognize that flooding local markets across the U.S. with rental conversions of REO properties would not be productive. In fact, officials said, their approach will be to carefully select geographic areas for bulk foreclosure sale, where there is a demonstrated demand for rental units, rather than cities and neighborhoods that need more "for sale" opportunities to owner-occupants.

This is one point that I don’t quite understand. Exactly how will they ever choose which neighborhoods “need” more owner occupied than rentals? That’s the scary part. I don’t know if I buy their ability to choose and select geographic areas. Wouldn’t the investor have the say in that more than anyone else? Let’s see, I’m investing 50 million dollars to help you and the economy out, and you’re telling me that I can’t have those properties that are in the best areas? I don’t think so.

Will the discounts to market value remain as high as the mid-90 percent levels when the government sells in bulk? Not a chance. Hedge funds and institutional investors will look for maximum discounts for their troubles. It will be up to the government officials negotiating the packages to push them hard on pricing, rental plans and management capacities, but chances are that they will probably look for at least a 30% discount to value overall.

Initial Response From Investment Groups

On August 10th of this year, the Treasury Department, HUD and the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie in conservatorship, issued an unusual "request for information" on how they might sell REOs faster by offering homes in giant bulk sales of $50 million to $1 billion.

Targeted buyers include hedge funds, large institutional investment groups, and real estate companies that have the capital and the national or regional scope and management teams to purchase and handle mass Bulk Foreclosure Sales conversions of REOs into rentals. This would get the REOs off the agencies' books much faster than is possible today.

The request produced more than 4,000 responses, which the FHFA has been analyzing for the past three months. Investors and funds that have been hoarding cash, waiting on generational deals that they knew had to happen at some point, are waiting anxiously.

Timetable

So when will the bulk sales start happening. Some say the first sales of 500 to 1,000 homes are happening right now in December, while the first big chunks of REO’s (up to 10,000 units at once) will take place as early as January or February 2012. The success or failure of the first two or three big transactions will probably determine how fast the process continues or if it continues at all.

Effects on Your Community and Property Values

If you live in a small, cozy community, your comps and property values aren’t as likely to be hit as hard as some major metropolitan areas that will obviously have more of these REO properties in the area, but every area will have some. I’ve seen foreclosures here in our cozy village towns in all price ranges from $50K to $500K. If you only had one or two properties in your neighborhood that were in a package of 100 other homes, and they were sold to Wall Street Fund A for 30% below normal values, it will have an effect on your property value. No question. How well they cushion the impacts on neighborhoods, stemming from bulk-sale conversions to rentals and away from owner-occupancy, will be the real concern. The quicker we clear the inventory that is sitting on the market, the quicker prices will continue to stabilize, but what we should be concerned about is the long term effect on Main Street USA and not losses for Freddie Mac and Fannie Mae.

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