FHFA REO Bulk Sale Program – what you need to know.

In response to the ongoing depression in our country’s housing market, the federal government has proposed yet another one-size-fits-all band-aid solution to a highly localized problem. As with most of the knee-jerk proposals they have attempted during the past 4 years, this program will not resolve the underlying issue and, in some cases, will make it substantially worse. I’m talking about the Federal Housing Finance Agency’s (FHFA) ‘REO Initiative’ pilot program destined for implementation in Los Angeles and Riverside Counties.

What the program proposes to do is effect a ‘bulk sale’ of REO (bank-owned) properties in select areas in order to ‘remove this overburden of inventory’ from the housing market and convert it to rental units for 5 years. Currently designated in Riverside County – more than 2,500 REO units.

Here’s the problem with that. Contrary to what the government tells us we are experiencing, we actually have a significant shortage of housing units for sale to begin with. There are areas of the country where this program might be effective in accomplishing what the government claims to want to fix, but our area is not one of them. There are areas of the county with a 2 year inventory of homes for sale, prices are continuing their precipitous slide and consumes are not buying homes at any price. Our area is not one of those.

It’s been nearly four years since our market had an inventory in excess of 12 months. Following a record sales year in 2010 and continued strong demand in 2011 and so far in 2012, our inventory of homes for sale is less than four months. For much of that time it has actually been between 2 and 3 months and, as I have written before, if you back out the higher end homes (over $1,000,000) that are selling very slowly, our local inventory of salable homes in Murrieta and Temecula stands at just 1.7 months. A ‘healthy’ inventory is considered to be 6-7 months and we are waaaay under that. Taking a large chunk of properties off the market would only further reduce the opportunities for home buyers to find a home and may well result in further price erosion and market deterioration.

But how about the government’s second argument that we are suffering from a severe shortage of rental units and that by releasing these units to large investor groups we would replenish that stock? Again, not true. Nearly 60% of current single family purchases are by individuals or small local investors who are buying the properties to either A) fix up and re-sell to qualified buyers, or B) keep as rental units.

Local individuals and small investors would be eliminated from the equation as the government program would only sell large blocks of homes to institutional investors far removed from our community. In addition to eliminating opportunities for home buyers and investors, the program would also exclude local property managers, as the properties would be handled by new departments of these institutional giants, and it would remove local Realtors® from the equation either as selling or rental agents in the transaction.

And what is the logical consequence of some far removed institutional investor buying a group of 100 or 200 properties in Temecula? Well, they’d probably want to rent them out as quickly as possible so they would rent them out at the cheapest rate possible. After all, they’d be buying them for pennies on the dollar so any income stream is better than a continuing vacant property. While this may result in some short-term advantage for local renters, long-term it would result in another round of foreclosures as current owners who are barely covering their cost would no longer be able to do that and would lose those properties.

Finally, in what may be the crowning insult, the primary groups that would stand to benefit from these bulk sales are many of the self-same industrial investors whose bad practices enabled the housing implosion to begin with. So they would now be able to purchase the same properties they made bad loans on for a fraction of their original price and they’d be buying them with the bail-out money the government (read: you and me) gave them.

As I initially stated, there are areas of the country where removing properties from the market and converting them to rentals might be good policy. We don’t happen to live in an area that, by definition, would benefit and could see substantial harm to our fragile recovery. The National Association of Realtors® has submitted a letter signed by most of our local Congressional delegates to Edward Demarco, acting head of FHFA, along with a bevy of other federal functionaries requesting that this ‘solution’ be applied only to carefully targeted areas of the country and to cancel any proposed sales in Los Angeles and Riverside Counties, and indeed in the whole state. We don’t want it. We certainly don’t need it – but when has that ever stopped the federal government from giving it to us anyway? Remember Ronald Reagan’s 9 scariest words – ‘We’re from the government and we’re here to help’. He was undoubtedly thinking about a program exactly like this.