California advocates want to put the brakes on REO-to-rental
Claim: Flood of investor cash hurts vulnerable renters and owners
The flood of investors buying homes with cash may have peaked, but investors are still out in droves representing a large portion of the house-buying population.
In 2013 something like 40% of home sales were individuals using a mortgage, 40% were all-cash, more than about 15% were distressed sales and 5% were flips. That number of all-cash (mostly investors) is dropping, but they are still active.
That worries homeowner advocates who think investors are pushing potential homebuyers – people who will buy a home and live there – out of the market.
Now some 78 organizations are calling on federal regulators to address first-time homebuyers being outbid, tenants being displaced, and neighborhoods undergoing dramatic changes as private equity and investor cash continues flooding into local housing markets, buying up homes.
These problems, they say, have been worsened by banks withholding REOs from the market and federal housing agencies conducting bulk sales of foreclosed homes and distressed mortgages.
The demands from the advocates range from the reasonable to the ridiculous. They want more oversight from various federal regulatory bodies and studies on the disparate impact of REO on various communities, but they also demand more transparency in agency rating for REO securitizations, which are already under regulatory microscopes.
So far, two portfolios of single-family rental homes have been securitized. Analysts from JPMorgan Chase (JPM) and Credit Suisse (CS) said they see a lot of potential growth in REO-to-rental as an investment in 2014.
“There are some eerie parallels between what’s happening now and the mortgage meltdown. In both cases, the overarching similarity is a drive for higher and higher profits without regard for harmful impacts on families and communities,” said Kevin Stein, associate director of the California Reinvestment Coalition. “That’s why we’re ringing the alarm bell now and asking regulators to act. Wall Street and other cash investors are making it harder for families to buy their first house, for renters to stay in their communities, and for neighborhoods to recover.”
The advocates' complaints include:
- Worse outcomes for borrowers and communities of color: Low income borrowers and borrowers of color are harmed when banks don’t provide equal access to mortgage modifications, don’t maintain REO properties (affecting communities and potential first-time homebuyers), and when first-time homebuyers with FHA loans are shut out of the market.
- First time homeowners locked out of the market due to “all-cash” offers from investors, and banks artificially inflating housing values by not releasing REO properties.
- A lack of regulatory oversight for new investor landlords.
- Government housing agencies contributing to the problem by conducting bulk sales of properties and mortgages — a practice that favors large investors to the detriment of homeownership, long-term tenancy, and stabilized communities.
The advocates want the following:
- FHFA and FHA should ensure that existing GSE and FHA rules for loan modifications are followed; FHFA needs to increase flexibility so homeowners with mortgages owned by Fannie Mae and Freddie Mac can fully participate in the “Hardest Hit Funds” programs; and the CFPB, FHFA, and other bank regulators need to scrutinize servicing and foreclosure practices of companies who may have business incentives to favor foreclosure over modifications;
- Examine disparate impacts on communities of color created by banks favoring cash investors over homebuyers with FHA loans, and from banks not properly maintaining REOs, which can violate the Fair Housing Act, and also decreases the chances a homebuyer with an FHA loan will be able to purchase it;
- Protect tenants from displacement: FHFA should ensure that GSE servicers and agents are complying with anti-eviction and habitability rules in REO properties; tenants should be offered two-year leases on GSE properties that become REOs; policies should be developed to address unaffordable rent increases by investor landlords; and the CFPB should begin enforcing the Protecting Tenants at Foreclosure Act.
- Suspend bulk sales: FHFA and HUD should suspend their bulk sales of homes and mortgages until they can carefully analyze potential fair housing issued created by bulk sales (and release this data publicly); FHA should consider preferences for selling distressed loans to nonprofits who will prioritize homeownership; Banks should be incentivized to sell distressed loan pools and REOs to nonprofit organizations, thus prioritizing homeownership and stability.
- Ensure ratings are accurate for securitizations: The SEC and other regulators must demand transparency and accuracy in any ratings given to rental income securitizations to ensure investors are not unwittingly financing another housing bubble.
The effect on home prices is debatable. The demands of these groups would effectively put the brakes on REO-to-rental.
Jed Kolko, chief economist with Trulia, said that while housing affordability will worsen in 2014 and home buying will decline, he doesn’t think the wave of institutional investors have a significant effect on rental rates, especially in markets like California where much of the price appreciation can be attributed to the “big bounce” of coming back from the 2008 crash.
“I compared the increase in single-family rental share with price and rent changes over the past year. Markets with larger increases in the single-family rental share had higher price and rent gains in the past year," Kolko said. “However – and this is what I suspected when we first talked about this – there’s another factor: the severity of the housing bust. Harder-hit metros saw both a bigger increase in single-family rentals and higher price increases in the past year (due to the rebound effect).”