REO investors squeezing out owner-occupants
Owner-occupancy rates of real estate owned sales are plummeting as investors who recognize their economic value are taking advantage of bulk transactions, a trend that nonprofits and trade groups are closely monitoring. New Vista Asset Management, a San Diego-based provider of real estate services for sellers of foreclosed residential homes, performed a three-year study that found 17 of 18 counties hit hardest by the country's mortgage crisis experienced a drop in REO properties sold to owner-occupiers. The company tracked all real estate sale transactions closed in the first quarter of 2009 and includes consecutive quarterly data through the third quarter of 2011. The study included REO sales private banks, Fannie Mae, Freddie Mac and the Department of Housing and Urban Development. According to the GSEs' financial statements, 59% of REOs sold by Fannie Mae in 2011 went to owner-occupiers, while 70% of Freddie Mac's REO sales went to owner-occupiers. Because the GSEs put in first-look programs to push more REO to owner occupiers, investors could be fleeing to private banks for these properties. Quarter-to-quarter, some markets saw increases in the owner-occupier rate, but over the period of the study, owner-occupancy rates for REO broadly weakened. The findings support recent investor sentiment toward new government REO programs. The Federal Housing Finance Agency in October began to develop new pilot programs to more efficiently unload foreclosed homes held by Fannie Mae and Freddie Mac. Investors are extremely enthusiastic about acquiring GSE and Federal Housing Administration REO properties in bulk and renting or selling them, Amherst Securities Group has said. Amherst's report focuses specifically on the supply and demand imbalance that is currently making it difficult for property owners to offload properties. This imbalance has created a systemic shift in the housing market, making it more attractive for investors to eye properties as rentals that could potentially produce yield while improving the overall housing market. "It is very clear to us that the economic value of the homes involved, and the benefit to the economy, is maximized by bulk auctions to investors (who will then turn them into rental housing)," said Amherst. "The massive housing market overhang is a clear danger to the U.S. economy — it creates significant stress on borrowers, communities, courts and the banking system — and is stifling growth in the broader economy." Nonprofits and trade groups are stressing the importance of documenting any partnership with an investor to make sure these neighborhoods are maintained and begin recovery after the REO is sold. Most want documentation to ensure investors with poor management histories do not have access to bulk transactions. Freddie Mac sold a record number of real estate owned properties in 2011 and received decent pricing on most of them, according to Tracy Mooney, senior vice president of single-family servicing and real estate owned properties at the GSE. Mooney said that the majority of REO sales at Freddie are going to owner-occupants. "While we have always been open to selling to investors, our strategy is to limit the concentration of investor sales in any given area," Mooney said. "In addition, we do not typically consider any offers that require significant discount pricing." The longer the property sits, the more cash buyers end up with the property, often for steep discounts. For the 2006 REO that resold more than one year later, 55% went to cash investors, compared to 40% for the entire foreclosure stock that year. New Vista's study used data extracted from local recorder, courthouse and tax assessment records to determine whether the purchasers buying foreclosed houses from banks, HUD, Fannie Mae and Freddie Mac, are owner-occupants or absentee owners using single family homes as rental or vacation properties. The pace and scale of decline varied widely across markets, according to the study. In Los Angeles County, Calif., for example, the New Vista data shows 79.36% of single-family REO houses were purchased by owner occupants in 2009, compared with only 60.32% in the third quarter of 2011. Most counties covered by the study saw declines of more than 5% during the same period, with a few dropping more modestly. Only one county included in the index, Wayne County, Mich., had an owner occupancy rate for single-family REO sales below 50% in 2009. By the third quarter of 2011, owner occupancy rates for REO sales in an additional four of the studied counties had fallen below 50%, including Maricopa County, Ariz.; Osceola County, Fla.; Miami-Dade County, Fla.; and Clark County, Nev. "The increased investor acquisition of REOs is reversing the years of community development progress that nonprofits have facilitated throughout California," said Kevin Stein of California Reinvestment Coalition. "We need to ensure that lenders, nonprofits and government agencies are working together to give qualified homebuyers a fair chance to purchase REO properties and help stabilize residential neighborhoods," he said. Write to Justin T. Hilley. Follow him on Twitter @JustinHilley.