The California Association of Realtors® (CAR) has been at odds with the Federal Housing Finance Administration (FHFA) over its REO Initiative - better known as the "REO-to-rental" program - for some months now. This past week the battle - or at least the rhetoric - has heated up. On August 22, CAR issued a press release that said the FHFA "is moving ahead with its REO bulk sales pilot initiative in a highly secretive manner, despite vehement opposition from California congressional members, the negative economic impact to the state's housing market, and cost to taxpayers…"
CAR President, LeFrancis Arnold, expressed disappointment "that Fannie Mae and the FHFA fail to understand that this initiative will harm the communities in which it will be implemented and are going forward with this ill-conceived plan." He added, "not only are Fannie Mae and FHFA moving forward with the plan, they are refusing to disclose any details, such as property locations, final property count, sales price, or names of winning bidders."
In February the Federal Housing Finance Agency (FHFA) announced the first pilot transaction under its REO Initiative, "targeted to hardest-hit metropolitan areas." According to FHFA, "prequalified investors will be able to submit applications to demonstrate their financial capacity, experience and specific plans for purchasing pools of Fannie Mae foreclosed properties with the requirement to rent the purchased properties for a specified number of years."
Reaction to the announcement was underwhelming in some circles. The National Association of Realtors® (NAR) urged FHFA to "proceed cautiously" with its programs. NAR President Moe Veissi wrote "we are concerned that REO-to-rental programs are not necessary in some areas and could even hinder the recovery." "In many communities," he said, "REOs are already moving well through the normal processes, so we urge caution when proceeding with a rental program."
NAR concerns were echoed by the California Association of Realtors® (CAR). The CAR President wrote to the California Congressional Delegation, "Los Angeles and the Southern California region have been named as a potential pilot program location. However, these areas are experiencing an inventory shortage and many homes for sale, especially distressed properties, are receiving multiple offers."
The goals of the initiative have been a moving target. In general, though, the stated aims have been (1) to further stabilize home values by reducing the excess supply of homes for sale, (2) to hold down the rise in rental prices and to maintain a stock of affordable rental housing, (3) to 'stabilize neighborhoods' (whatever exactly that is supposed to mean), and (4) to reduce financial losses to the agencies.
It is in light of these professed goals that much of the current questioning has been raised. As noted earlier, CAR has pointed out that there is not an excess of supply in the Los Angeles area. Moreover, this is generally true throughout the country. NAR has noted that "total unsold inventory has trended down from a record 4.04 million in July 2007, and is 20.6 percent below a year ago." In the month of January, when Chairman Bernanke was telling Congress of excess inventory, NAR reported a national inventory of 2.3 million. That equated to a six-month supply, which is usually considered a normal market.
Moreover, as even Chairman Bernanke observed in his report, bulk sales to large investor entities are bound to result in much greater price discounts than are seen in individual REO sales. In addition to that, the fact that "seller financing" will probably be necessary means that the agencies will incur even greater financial risk while at the same time realizing smaller gains.
In his February letter, CAR President Arnold said, "we fear the regulators have not appropriately analyzed proposed pilot cities. Los Angeles and the Southern California region have been named as a potential pilot program location. However, these areas are experiencing an inventory shortage and many homes for sale, especially distressed properties, are receiving multiple offers. Removing REO inventory through a bulk sale and rental program will hurt these communities. In addition, the taxpayer will lose because these REOs will be sold for less money in bulk sale than if sold as individual units."
In May, California Congressman Gary Miller and seven other members introduced legislation (H.R. 5823) that calls for FHFA to cease its plan to see Fannie Mae-owned foreclosed homes in California to large investors. Nonetheless, FHFA announced earlier this summer that winning bidders in the program had been chosen, with transactions expected to close in the third quarter. Fannie Mae created an LLC in California to transfer the REOs from Fannie Mae to the LLC. It is not known whether the winning bidders will purchase the full LLC, the individual properties, or a share of the LLC.
It wouldn't take a radical conspiracy theorist to believe that yet another government agency is now in the business of picking winners and losers in the marketplace, handing out lucrative contracts and deals to favored entities. Whatever. Last week's CAR press release noted that CAR is filing a request for details through the Freedom of Information Act.