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» VISIT US ONLINE @ DSNEWS.COM POINT—COUNTERPOINT I foreclosed properties, lawmakers and local Realtors in California argue the program is not needed in Riverside and Los Angeles, where nearly 500 properties were slated for the pilot sale. DS News asked two industry experts, both of whom are based in California, to weigh in on the pros and cons of implementing the REO-to-rental initiative in the state of California. According to Sean O'Toole The FHFA should hold back from selling California REOs in bulk. Such sales would be the solution for a problem that doesn't exist, and they will harm the market more than help it. Bulk sales make sense when you have an overabundance of housing inventory and a lack of buyers, neither of which exists in California. If you look at the California Association of Realtors (C.A.R.) market data for July, there's 3.4 months of unsold inventory statewide, which is down 40 percent from a year ago. Realtors throughout the state are now regularly reporting bidding wars, and housing affordability is declining in many counties as prices rise. Some believe there is an excess of bank- owned homes in California, but that clearly is not the case. We track each and every bank- owned property in California, and currently, there are only 65,000 REO homes in the state. These are selling at a rate of 7,000 to 8,000 each month, which leaves about 8.5 months of bank- owned inventory on the books. While this may seem significant, it is are often "structured" transactions. This may mean, among other things, that the seller (FHFA) is providing financing for a significant portion of the purchase. While FHFA hasn't released sufficient data on the bids from this first bulk sale pilot to understand the structure and terms, it seems likely that taxpayers will remain on the hook for the downside, while private equity firms get most or all of the upside. We've seen this movie before … steal Unlike individual sales, bulk sales n order to clear out surplus REO inventory, the Federal Housing Finance Agency (FHFA) introduced a pilot program that involves the bulk sale of Fannie Mae REO properties to institutional investors. The properties, which are mostly occupied, are to be converted into rental housing. While the program can relieve distressed markets of a supply overhang of discounted, of the program and participate in any upside when the properties are ultimately sold. Home prices will be decimated by these bulk sales. The removal of distressed properties from the sales inventory is likely to have exactly the opposite effect—scarcity usually drives prices up, rather than down. And keep in mind that we're only talking about 484 properties in a state where 7,000 to 8,000 REOs are purchased every month. Even if all 484 homes were sold at steep discounts, it's unlikely they'd have a material effect on overall home prices. Homebuyers are being blocked out of the market by large investors. The overwhelming majority of properties opportunities from small investors and homebuyers, give politically connected firms the upside, while leaving taxpayers to hold the bag if something goes wrong. According to Rick Sharga Critics argue there is no reason to conduct important to remember that it takes banks, on average, 9.5 months to evict the occupants, rehabilitate the property, market it for sale, and go through escrow. Clearly banks are ahead of the game when it comes to disposition of these properties, and there is certainly no excess. Typically, when homes are sold in bulk by an bulk sales in Los Angeles and Riverside counties, where inventory is low and demand relatively high, and where REO homes are often sold within 30 days of being listed. So let's get this out of the way: There is included in the Fannie Mae pool are already being rented. Traditional homebuyers aren't typically the people who buy rental properties, so the argument really comes down to whether an area is better off with rentals being owned by an institutional investor or an individual investor (an interesting debate for another day). Neighborhoods will be damaged by the infusion of large numbers of renters. The facts don't support the argument. virtually no way to build a mathematical argument proving the FHFA needs to sell off California REO assets in bulk to clear out inventory. There. I've stated the obvious. Less obvious agency like FHFA, they're sold on the condition they won't be resold for a certain period of time and instead will be rented. This is designed to protect local markets from excess inventory. However, resale activity presents opportunities for small investors and first- time homebuyers. It also employs local real estate agents, local title companies, local inspection services, and moving companies. These opportunities are stolen from the local economy when bulk packages of properties are purchased by large Wall Street-based private equity firms that are restricted to renting them out to tenants. are the answers to these questions: Should FHFA be precluded from selling off REO assets in bulk? And how valid are the arguments against these types of bulk sales? Let's take a look at some of the most common arguments. Taxpayers will be saddled with losses from deeply discounted sales. This might be true of traditional bulk Again, most of the properties are already rented, and those that aren't rented are vacant, and often deteriorating. Let's put this in perspective: There are approximately 14 million housing units in California and about 65,000 REO homes. If all of the REOs were converted to rentals, they'd account for less than one-half of 1 percent of the homes in the state, which hardly seems likely to cause major "quality of life" problems. FHFA probably doesn't need to sell off its sales—with discounts of 30 or 40 percent—but in the first pilot deal announced, the buyer agreed to pay 96 percent of current market value. In addition, Fannie Mae will continue to hold an equity position through a joint venture with the investor, meaning the GSE will share in rental income for the duration California REO assets in bulk, but there's no compelling reason why it shouldn't conduct limited sales of small pools to augment traditional sales channels. A well-executed program could meet the market's need for more rental properties and deliver enhanced revenues to taxpayers. There are about 250,000 California homes in some stage of foreclosure and a large number of homeowners delinquent on their loans. The sooner we can clear out the inventory—and shadow inventory—of distressed properties, the sooner the state's housing market can recover. 73

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