For those who aren’t familiar with the term REO, it’s short for Real Estate Owned and refers to properties that have gone through the foreclosure process, did not sell, so the bank has taken over as the owner on record for that property. The original homeowner lost it to foreclosure, the bank now owns it.
The Obama administration recently announced new plans to sell Fannie Mae, Freddie Mac and FHA REOs in bulk to mega-investors at deep discounts.
Which begs the question, who are mega-investors? Currently, they consist of: hedge funds, large institutional investment groups, and real estate companies with the capital, national or regional reach, and management capability to purchase and convert these REOs into rentals.
What dollar amount is considered “bulk”?
For these purposes, the government is discussing packages of $50 million to $1 billion.
The current process of selling smaller packages and/or passing out REOs one-at-a-time to real estate agencies is too slow to handle the volumes that banks are currently holding and the massive wave of new REOs on the horizon. Fannie, Freddie and FHA have a combined 1.4 million delinquent loans on their books, at least half of which, they estimate, will end up in foreclosure.
This new process would enable banks to finally clean up their books and, the goal being, get back to banking.
Will deep discounts to these investors be what we’re seeing offered to the market today? No way. Hedge funds and institutional investors will want maximum discounts for the relief they offer.
Some fear the new plan will eliminate millions of dollars in commissions to real estate brokers who now handle foreclosures. All three of the agencies currently sell primarily through real estate agents and nearly 103,000 FHA REO sales last year produced broker commissions of around $420 million. However, I haven’t heard anywhere that piece of the process, selling through agents, will cease.
If they do change to selling only in bulk at a level that will block out smaller investors and agents then, yes, another blow to the general public. Surely the government and banks won’t hit us again, will they?
Some are concerned these properties will be filled by renters rather than owners. I believe this is inevitable no matter who buys them. It’s much harder to re-sell today because lenders aren’t lending and many potential buyers have damaged credit.
And I believe that, going forward, credit will play an even larger part in the qualification process. People who went through foreclosure casually because “everyone’s doing it” will wish they had been slower to choose that path, as banks become less forgiving than everyone’s counting on. Remember, it’s actually a very small percentage of the population that’s experienced foreclosure.
The government does recognize that flooding markets across the U.S. with rental conversions of REOs would not be productive. Their plan is to select geographic areas with a demonstrated demand for rental units.
When will this new bulk selling start? Projections are for a bulk sale of 500 to 1,000 homes as early as this month, December 2011, or larger transactions of up to 10,000 units during the first quarter of 2012.
How will the new bulk selling of REOs impact you?
For more on this topic, see Ken Harney’s article in Inman News.