Jan092012

REO inventory at the GSEs and FHA growing out of control

Three recent news stories strongly suggest the GSEs have too many REOs, and they are working feverishly to prevent their REO inventory from growing out of control.

First, the federal reserve has identified markets to sell bulk REOs to companies willing to convert them to rentals and hold them until the market recovers to sell off their REO inventory in bulk.

Second, the FHA has waived the anti-flipping rule again to help them clear out their REO inventory.

Third, Freddie Mac has extended the forbearance for jobless borrowers so they don’t have to add to their REO inventory.

These stories paint a picture of a federal government desperate to manage an REO inventory which must be growing out of control. To make matters worse, a federal reserve white paper states there are four times as many properties in the foreclosure process as there are currently in REO inventory. The shadow inventory of properties yet to enter the foreclosure process is many times larger than the number in process. How long can the federal government hold back the forces of the market?

Fed Identifies Markets Primed for Bulk REO-to-Rental Programs

01/05/2012 By: Carrie Bay

The Federal Reserve is throwing its support behind a large-scale REO-to-rental program to address the oversupply of vacant foreclosed homes and prevent property values from falling further.

In a white paper distributed to key lawmakers on the House and Senate banking committees, the Fed notes that in contrast to the market for owner-occupied homes, the market for rental housing is strengthening.

We have been seeing the same here in Orange County. Prices are falling and rents are rising. In markets like Las Vegas where prices are very low, rising rents and falling prices create excellent investment opportunities.

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Because the housing crisis has forced millions of Americans out of their homes, made many others wary of purchasing a home, and constricted credit availability, Fed officials contend there is a long-term need for an expanded stock of rental housing.

“[T]he decline in house prices and the rise in rents suggest that it might be appropriate in some cases to redeploy foreclosed homes as rental properties,” according to the Federal Reserve.

The bogus part of the federal program is selling them in bulk to a big corporation. There is no reason this problem cannot be handled by selling these properties one at a time to individual investors.

The central bank says a government-facilitated program, in particular, has the potential to not only help the housing market but improve loss recoveries on REO portfolios for Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA).

That’s bullshit. Selling in bulk is the worst possible loss recovery on their REO. The discount will be so large that the government would be far better off selling them to individual investors who will not demand such a large discount.

Fed officials point out that one reason large-scale conversions of REOs to rentals have not occurred is because it can be difficult for an investor to assemble enough geographically proximate properties to achieve efficiencies of scale with regard to the fixed costs of a rental program.

Realistically, there is no good solution to this problem. For each layer of bureaucracy you add, the costs go up. Individual investors eliminate the bureaucracy and manage the properties more efficiently.

The Fed’s whitepaper also points out that the number of properties currently in the foreclosure process is more than four times larger than the number of properties in REO inventory, with similar geographic distribution. If recent trends continue, the share of REO inventory held by the GSEs and FHA should increase, according to Fed officials.

This problem is huge, and as I mentioned previously, this does not include the shadow inventory which is another order of magnitude larger than the number of properties in the foreclosure process.

FHA Waives Anti-Flipping Rule Through Year-End to Speed REO Sales

01/03/2012 By: Carrie Bay

The Federal Housing Administration (FHA) is extending the temporary waiver of its property anti-flipping rule through the end of 2012.

FHA rules typically prohibit insuring a mortgage on a home owned by the seller for less than 90 days. In 2010, however, the agency waived this regulation, and later extended the waiver through 2011.

The new extension announced late last week will permit buyers to continue to use FHA-insured financing to purchase HUD-owned and bank-owned properties, no matter how long the homeowner has held the title, through December 31, 2012.

FHA says the waiver will allow homes to resell as quickly as possible, helping to stabilize real estate prices and revitalize communities experiencing high foreclosure activity.

Have you noticed government officials are adept at talking out of both sides of their face? On one side, they don’t want to flood the market with REOs, so they want to limit the number of sales. On the other side, they want to resell their REO as quickly as possible to “stabilize real estate prices and revitalize communities experiencing high foreclosure activity” So which is it?

… The agency says its own research has found that in today’s market, acquiring, rehabilitating, and reselling foreclosed properties to prospective homeowners often takes less than 90 days.

As a result, FHA says prohibiting the use of its mortgage insurance for a subsequent resale within 90 days would adversely impact the willingness of sellers to consider offers from potential FHA buyers, namely because they would be required to cover holding costs and the risk of vandalism that comes with allowing a property to sit vacant over a 90-day period of time.

The FHA is trying to facilitate the quick turnaround of properties by providing the waiver of the anti-flipping rule. This benefits them because it allows them to sell their REO faster and helps clear the market.

Freddie Mac Extends Forbearance for Unemployed Homeowners

01/06/2012 By: Krista Franks

Freddie Mac announced Friday an extension in forbearance for unemployed borrowers. Some unemployed homeowners may now receive up to 12 months forbearance.

According to Freddie Mac, almost 10 percent of delinquencies in the GSE’s portfolio are linked to unemployment.

Wait a minute. If only 10% of delinquencies are related to unemployment, what are the other 90% related to. The conventional wisdom is that all the problems related to foreclosure are linked to unemployment. Many pundits have noted the correlation between delinquency rates and unemployment rates and inferred a direct connection. I have always thought this was nonsense.

If 90% of delinquencies are not related to unemployment, what are they related to? Excessive borrowing, excessive speculation, and toxic loan terms. The economy made the problem worse, but it was always about the bad loans, not job losses.

Previously, servicers could offer up to three months of forbearance without payment on Freddie Mac loans or upto six months of forbearance with reduced payments without prior approval from the GSE.

Increasing the forbearance from three to six months to a full twelve months will buy the GSEs some time, but it will also put the borrowers that much farther behind.

“These expanded forbearance periods will provide families facing prolonged periods of unemployment with a greater measure of security by giving them more time to find new employment and resolve their delinquencies.,” said Tracy Mooney, SVP of single-family servicing and REO at Freddie Mac.

“We believe this will put more families back on track to successful long-term homeownership,” Mooney said.

Nice spin. The reality is this will help the GSEs reduce the flow of properties into their foreclosure pipeline temporarily. In all likelihood, most of these people will lose their homes. If you get that far behind on payments, it isn’t likely they will recover.

A flood of REOs to hit the market?

So why is this important? Well, I have already documented that B of A and other lenders have ramped up their foreclosure processing (Surge in discounted REO expected next year). Now, it is apparent that the GSEs and FHA are overflowing with their own REO. If both the public and the private lenders have an excess of REO, and the banks are getting more, what are they going to do with them? Sell them, of course. The resulting REO sales will drive prices down again in 2012.