A common misconception

First, let’s clear up a misconception. Foreclosure is a process, usually involving a court of some kind; the process can vary depending on the state. REO means Real Estate Owned; it is what a house becomes after a foreclosure, when a bank or government entity purchases a home back. It actually comes from the term, OREO, meaning Other Real Estate Owned, meaning a non-performing asset on the banks books. The two terms are not interchangeable, and do not mean the same thing. With that being sorted out, let’s get down to business.

The government, as in the Treasury Dept, and the Federal Housing Finance Agency, has issued a Request for Information on how to deal with all the REOs that Fannie, Freddie, and FHA have on their books. There is a fairly big push coming from The Obama Administration, and Sen. Reed who wrote a letter to the FHFA director earlier this month, encouraging the government sponsored entities (GSEs) to start renting out their REOs. They are asking for either outright purchases, in bulk, or possible joint ventures with the GSEs, to maybe even some other kind of partnership. The public and other entities have until September 15th to comment.

Over 250,000 REOs between FHA, Fannie & Freddie

These are the ones that have actually completed the foreclosure process, some are currently listed, about 77,000, and some are pending, waiting to close, about 22,000, according to DSnews. Shadow inventory, the ones in the pipeline, the homes that have received a NOD, the ones that are still going through the foreclosure process, in other words, are not mentioned. Because of the way notes have been sold, and resold, there may not be way to determine how many are actually out there waiting down the line. We really are looking a lot of houses potentially flooding the market, just from the GSEs.

It’s no secret that the GSEs have been losing money. A lot of money. Part of the push for converting REOs into rentals may be coming from the idea that non-performing assets could generate cash flow, if as above, some of these were done as a partnership with the GSEs. We are talking about rentals en mass, here. Not 3-10 at a pop, but entire geographical areas. In theory, this should stabilize housing by not selling crappy REOs at a discount, it’ll also make rent more affordable in some areas, it could also create jobs since many will need rehabbed.

Theories usually suck though. We have to look no further than The Washington Post’s investigation into HUD’s HOME program. What had transpired were many incomplete projects, lost money, money that didn’t get used, money that came from the government and was dedicated to these projects no less, and projects that were completed, but sitting vacant. Some things were done correctly, yes, but not a lot compared to what was screwed up. The potential for the same types of things going awry with a rental program is huge. What is the Government going to do, make investors sign a piece of paper saying “I promise to be a good landlord, treat tenants right, rehab all the properties according to code, not be a jerk and defraud anyone?” Uh-huh. Sure.