California Realtors say Fannie Mae and Freddie Mac's federal regulator is moving forward with bulk sales of real estate owned (REO) homes in "a highly secretive manner," without giving full consideration to the objections of California lawmakers or the program's potential negative economic impact on housing markets and cost to taxpayers.
The Federal Housing Finance Agency is implementing an "ill-conceived" plan while "refusing to disclose any details, such as property locations, final property count, sales price, or names of winning bidders," said LeFrancis Arnold, president of the California Association of Realtors, in a statement
FHFA, the federal regulator that oversees Fannie Mae and Freddie Mac, announced last year that was considering bulk sales of properties to investors, with the goal of converting REO properties into rentals.
After collecting feedback and under pressure from lawmakers to move forward with the program, FHFA in February announced the launch of a pilot initiative targeting bulk REO sales in metropolitan areas "hardest-hit" by the foreclosure crisis, including Atlanta, Chicago, Las Vegas, Los Angeles, Phoenix and parts of Florida.
The REO initiative offered qualified investors about 2,500 single-family foreclosed properties owned by Fannie Mae, including nearly 500 properties in the Los Angeles and Riverside areas in California, with the requirement that the investors rent out the properties after purchase for a specific period of time.
FHFA announced in July that it had chosen the winning bidders in the REO pilot initiative and that transactions were expected to close early in the third quarter.
Claiming a lack of transparency, CAR last week filed a Freedom of Information Act request with FHFA demanding further details about the REO pilot program, including records pertaining to an LLC created by Fannie Mae, SFR 2012-1 US West LLC. The LLC was apparently created to transfer the California foreclosed properties from Fannie Mae to the LLC, but it's unclear whether the investors will buy the full LLC or only a share of it, with Fannie Mae retaining some ownership, CAR says.
"We had hoped Fannie and FHFA would have told the public they were planning on using LLCs to perform these transactions for the purposes of transparency, and especially since filing for an LLC is public record anyway," CAR said in a statement provided to Inman News. "We are asking for the details of the LLCs so the public has full knowledge of how much of the LLC is owned by Fannie (and thus the taxpayer) and how much is owned by the private entity, as well as who that entity is."
CAR said hundreds of properties "are going to be partially owned by a government-guaranteed entity if Fannie retains a stake in the LLC. Our members who are residents in that community and the taxpayers backing Fannie Mae should have full access to the records of this LLC."
Arnold also expressed concern that FHFA might have used "extremely outdated" market data, perhaps from 2011, to determine property valuations. Home prices in the Inland Empire and the Los Angeles metro area rose 11.3 percent and 12.9 percent year over year, respectively, in July, according to CAR figures.
Florida's state-level Realtor association, Florida Realtors, said in a statement last week that it had "expressed concerns to The National Association of Realtors (NAR) about the issue and is requesting member feedback on how the FHFA bulk sales issue affects the Florida market."
FHFA spokeswoman Stefanie Johnson said the agency will announce the winning bidders soon. When asked whether FHFA would disclose property locations beyond metro area, final property counts, sales prices, or how property valuations were made, Johnson said, "We will include the pertinent information after transactions close," and declined to comment further.
In announcing the REO pilot program in February, acting FHFA director Edward DeMarco said it was designed "to reduce taxpayer losses, stabilize neighborhoods and home values, shift to more private management of properties, and reduce the supply of REO properties in the marketplace."
FHFA had previously said it would approve bulk sales only in areas where there's a glut of properties on the market. Like much of California, the Inland Empire is currently experiencing a shortage of available for-sale inventory and REO listings in the area are selling in less than 30 days, CAR said.
"Homes in the bulk sale program will be held off the market and then rented for a number of years under the agreement," CAR said in a statement to Inman News. "This takes housing out of for-sale inventory, thus, preventing first-time home buyers from purchasing those homes, and the mom and pop investor who lives in the community isn't able to make an offer on an investment home with a tenant already in place."
Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) faced "a tsunami-sized shadow inventory" of 1.4 million delinquent loans on their books, at least half of which were expected to end up in foreclosure, Inman News columnist Ken Harney noted in writing about the REO-to-rental program last year.
Although real estate agents and brokers stand to lose out on sales commissions they would earn when REOs are sold individually, CAR says the program is a concern for its 155,000 members "specifically because it hurts the housing market in which they work and live."
In April, CAR applauded a letter 19 members of California's congressional delegation sent to DeMarco objecting to the REO-to-rental program.
"In California, there is no question that disposing properties through bulk sales will yield a lower return for (Fannie and Freddie) and taxpayers than through traditional disposition methods," the lawmakers said.
One member of the delegation, Republican Rep. Gary Miller -- who's getting major backing from NAR as he runs for reelection to Congress in a new district -- introduced a bill in May that would keep the FHFA from implementing the pilot program in California. It is currently in a House subcommittee.
NAR expressed its own reservations about the REO-to-rental program earlier this year.
"Realtors support efforts to reduce the high inventories of foreclosures, but all real estate is local and we are concerned that REO-to-rental programs are not necessary in some areas and could even hinder the recovery," said NAR President Moe Veissi, in a statement. "In many communities REOs are already moving well through the normal processes, so we urge caution when proceeding with a rental program."
The trade group called for the creation of a national advisory board that would "ensure that current and future REO-to-rental pilot programs truly benefit the local community, minimize taxpayer losses and stabilize home values." NAR also suggested the "substantial participation" of local market experts on such a board, particularly licensed real estate professionals.
Contact Andrea V. Brambila:
Letter to the Editor