Transaction and Regulatory Committee Housing Committee Federal Committee
This material is for discussion purposes only and has not been approved by the Transaction and Regulatory Committee, Housing Committee, Federal Committee, Executive Committee or the Board of Directors.
Issue: Should C.A.R., in conjunction with NAR, comment on proposals to utilize securitization to fund bulk purchases of Real Estate Owned (REO) properties which will be rented?
Action: Optional Lenders and investors have announced it is their goal to roll out the first of these financial instruments by the end of 2012 or the first quarter of 2013.
Options: 1. Take a “SUPPORT” position 2. Take an “OPPOSE” position 3. Craft recommendations for a REO to rental security program 4. Take no position
Background: Over the last year, hedge funds, investment banks, and other large investors have increased their purchase of single-family REOs for the purpose of renting out and selling at a later date. To date, these have been individual purchases or small bulk sales. Since the U.S. government proposed a REO-to-rental bulk sale program back in August of 2011, real estate and securities investors have considered how to finance as many bulk sale transactions as possible. One of the ideas that has recently gained significant attention is the proposal to create a REO-to-rent security. Moody’s, Standard & Poor’s, as well as others have already analyzed this idea.
Currently the government has not stated they will continue with a bulk sale of their REO’s following an analysis of their REO-Initiative pilot program. However, even if the government does not continue to utilize the FHFA REO-Initiative, there is the possibility that lenders and servicers of non-agency loans (both in portfolio and in private label securities) will see this as an opportunity to expediently unload nonperforming assets from their books.
Questions still remain as to how a security backed by a REO-to-rental program would work. Some of these include: • Is income to the investor provided by rental income only or does it include property appreciation? • Is the security canceled out as properties are sold or are those properties simply replaced? • How can the security be tranche for different risk pricing? • Will investors want geographic diversity or geographic concentration within a given pool? • What are the tax implications? • How will the properties be managed?
Support: Supporters of this proposal say: • REO-to-rental securitization is a market based approach to absorbing excess inventory. • It allows the market to address the high number of foreclosures on an economy of scale. • It provides an additional avenue of real estate investing for Wall Street besides Real Estate Investment Trusts (REITs). • With the current low interest rates offered on Government Treasuries, Wall Street is looking for safe investments with higher returns. This type of investment is seen as meeting this need.
Opposition: Opponents of this proposal say: • This is not necessary. The creation of these instruments will create a permanent market for what is a temporary problem. Additionally, small mom & pop and medium size investors are providing enough demand to absorb California’s supply of REO inventory. • Once these homes are in the security, how long will they be off the market? This is a pivotal question since these are single-family residences, many of which are entry level residences which cannot be replaced in California because of the high-cost of construction. • Because some cities have a stronger rental market than others, there is a strong possibility that the capital provided by these securities does not go to neighborhoods that need this program the most. • In order to provide a continued supply of REOs, this program will promote foreclosures over modifications.
C.A.R. Policy: C.A.R. does not have specific policy on the creation of a financial instrument to securitize REO-to-rentals.
C.A.R. has policy opposing the bulk sale of REO properties that were financed by government guaranteed loans. C.A.R. does not oppose the bulk sale of non-agency and/or private label security REOs.
NAR Policy: NAR has not taken policy on this issue.
Should C.A.R., in conjunction with NAR, “OPPOSE” proposals to utilize securitization to fund bulk purchases of Real Estate Owned (REO) properties?