Apr202012
Converting REO to rentals projected to be a $100 billion industry in 2012
A couple days ago, I postulated that lenders would utilize REO to rental programs to the extent feasible: 
… First, it gives them immediate capital. They don’t have to wait as they slowly liquidate on the MLS. Opponents of these programs — mostly realtors who fear loss of commissions — postulate lenders will recover less when selling in bulk. Lenders will have to discount the properties more to liquidate in bulk, but they also eliminate a 6% commission to listing agents, so the net may be the same. And since lenders are recovering their capital more quickly, the benefits outweigh the discounts required.
Another advantage of the REO to rental program is that lenders don’t have to dispose of those properties on the MLS forcing prices to move even lower. When distressed sales dominate the market, prices move lower. If lenders can reduce the number of distressed sales, they can stop the decline in prices — which is why they are withholding inventory now. The REO to rental program takes sales off the MLS in 2012-2015 and moves them to 2016-2018 or later. This may stop the declines in the short term, but it will almost certainly inhibit appreciation in the long term as this overhead supply is metered out over time.
Since these two advantages to lenders are so beneficial, I suspect the REO to rental programs will see explosive growth over the next few years as investors gear up to buy billions of dollars worth of single-family homes. That’s how lenders will liquidate many of their upcoming foreclosures.
I am not the only one who believes these two advantages will compel lenders to try to sell a great many homes to investors.
Turning Foreclosed Homes Into Rentals Could Be $100 Billion Industry This Year
The Huffington Post | By Harry Bradford Posted: 04/13/2012 3:39 pm Updated: 04/13/2012 3:39 pm
The business of turning foreclosed homes into rentals is set to boom.
The practice could be a $100 billion industry this year, according to a report from real estate tracker CoreLogic. That’s equivalent to $125 for every Facebook user, the cost of halving global poverty for two years and 250,000 times the salary of the President of the United States, according to The Guardian.
I have been lamenting the collapse of my industry over the last five years. Perhaps now I am positioned to benefit as money pours back into real estate. Not many have my experience with converting REOs to rentals.
Why is the market for foreclosed properties-turned-rentals poised for a boom? In the aftermath of the housing bust, demand for owning homes has fallen, pushing rents up and home prices down. In response, everyone from big banks to smaller firms are increasingly taking advantage of the disparity by turning foreclosure properties into rental homes.
I was ahead of the market when I suggested prices would crash in 2006. I was ahead of the market again when I said buying rentals was a good investment in 2010. 
Bank of America is currently running its own pilot program to rent homes to families that have been foreclosed on, called Mortgage to Lease. In addition, private equity firms and hedge funds are now spending hundreds of millions of investment dollars and racing to buy up foreclosed properties.
In turn, Bank of America and government mortgage giants Fannie Mae and Freddie Mac are responding to the demand, selling off their holdings of foreclosed homes by the hundreds. Just this week, Bank of America announced a bulk offering of 500 foreclosed homes in six different states, following up on an offering of 200 properties late last year.
Meanwhile, Fannie Mae and Freddie Mac have sparked a bidding war when it put up 2,500 of the 200,000 foreclosed homes it currently owns for sale. That’s because Wall Street firms say they’re interested in buying up the properties and renting them out.
The practice of turning foreclosed homes into rentals is becoming so popular that the Federal Reserve issued guidelines earlier this month for banks to use when they’re flipping foreclosures into rentals. But the practice also faces criticism: Namely, some are concerned that the very banks and agencies responsible for the housing crisis in the first place will now benefit from their own questionable practices.
Sales are falling because lenders are withholding product. Lenders hope this will cause prices to go up. Most likely withholding product will merely cause transaction volumes to go down.
Now for the shills and the clueless…
Economists Respond to March’s Fall in Existing Home Sales
The National Association of Realtors (NAR) reported Thursday that existing home sales decreased 2.6 percent, in March, to a seasonally adjusted annual rate of 4.48 million units, falling short of the 4.62 million economists had forecast. In response to this data, economists representing different institutions provided their insight to explain what the recent numbers might indicate.
Patrick Newport, U.S. economist, IHS Global Insight
“Existing home sales declined in March mainly because fewer investors bought homes. Sales to those looking for a home to live in have been flat (and weak) for the past six months, despite low borrowing rates, low home prices and rising rents. A critical
question is whether sales are set to take off soon, given the improving economy. Our view is that sales will improve during the course of this year, but unless credit conditions loosen significantly, a takeoff will not take place.”
NAR reported investors bought 21 percent of the homes sold in March, down from 23 percent in February.
Paul Diggle, property economist, Capital Economics
“March’s decline in existing home sales probably reflects the normal month by month volatility rather than renewed underlying weakness. The increase in households’ confidence in the outlook for the housing market, coupled with a gradual improvement in the pace of the economic recovery, should drive a rise in home sales later this year….It is possible that the pattern within the quarter has been driven by the weather, with falls in the most recent two months reflecting a degree of payback after January’s gain.”
Mark Vitner, senior economist and Anika R. Khan, economist, Wells Fargo
“Existing home sales dropped 2.6 percent, but are up 5.2 percent from a year ago. While existing sales are down for the second consecutive month, we are likely continuing to see payback from increases earlier this year. That said, we could see one more month of disappointing data, but we still contend the recent declines are not indicative of the trend. Stabilization will become more apparent once we return to normal weather.”
Diana Olick gets it.
Lack of Distressed Supply Pushes Home Sales Lower
Published: Thursday, 19 Apr 2012 | 10:46 AM ET By: Diana Olick
Sales of existing homes continue to drop, and while tough credit and weak consumer confidence are certainly factors, lack of supply appears to be the latest culprit.Inventories of existing homes historically rise in the spring, as sellers look to take advantage of the busy season; not so this spring.Inventories fell 1.3 percent to 2.37 million units for sale. That’s down nearly 22 percent from a year ago. Inventory is dropping because the number of distressed properties for sale is dropping.
The data speak volumes: Distressed sales fell to 29 percent of all sales in March, down from 34 percent the previous month. The investor share of sales also fell from 23 percent to 231 percent. That pushed overall home sales down, but most notably out West, where most of the distressed supply exists.
Sales fell 7.4 percent month to month out West in March, as supplies of existing homes fell to 3.1 months from 4.7 months a year ago, according to internal tracking by the National Association of Realtors. That is the lowest supply of any region by far, and half the national average. Compare it to an 11.6 month supply in the Northeast, where there are far fewer foreclosures.
Supply is tight because banks, after the 25 billion dollar mortgage settlement over so-called “robo-signing” have slowed much of the foreclosure process, trying to modify more loans or find foreclosure alternatives. We predicted this earlier.
Less supply usually means rising prices, if you go by the usual supply/demand theory. The trouble is, supply isn’t dropping because of so much demand, it’s dropping because of the distressed market.
Normal sellers still aren’t putting their homes on the market for fear of deep price cuts, or because they are so underwater they can’t afford it. More than 11 million borrowers currently owe more on their mortgages than their homes are currently worth.
On the demand side, credit is still very tight and fees for FHA loans, which had really been fueling much of the market, rose April 1st. We saw a huge drop in mortgage applications last week, driven by a 23 percent drop in FHA applications.
“This drop follows big increases in the demand for FHA loans over several weeks in anticipation of the FHA mortgage insurance premium increases that went into effect last week,” wrote Mortgage Bankers Association chief economist Jay Brinkmann in a release. “This was the largest weekly drop in the government purchase index since the expiration of the first-time homebuyer tax credit in May 2010.”
Without a strong recovery in the job market, which does not appear to be the case, and a big loosening in credit, which also does not appear to be the case, regular demand for home purchases will remain soft.
The potential demand among investors is strong and growing, but they need supply to buy, and they’re just not finding enough
Bottom line analysis of this article: Investors want over-leveraged borrowers and squatters to GET OUT so they can buy their homes at lower, truer-to-market prices, but the banks aren’t forcing out the deadbeats.
I sense a Mexican standoff coming…
Speaking of NAr, ‘top-ten spender’ … they really amped-up 2011 lobbying expenditures to buy more ‘influence’ vs 2010….
2010: $17,580,000
2011: $22,355,463
Total expenditures from 1998-2011; a whopping $178,352,843.00
http://www.opensecrets.org/lobby/top.php?indexType=s
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par·a·site
[par-uh-sahyt]
noun
1.an organism that lives on or in an organism of another species, known as the host, from the body of which it obtains nutriment.
2.a person who receives support, advantage, or the like, from another or others without giving any useful or proper return, as one who lives on the hospitality of others.
3.(in ancient Greece) a person who received free meals in return for amusing or impudent conversation, flattering remarks, etc. LOL
I read thru your prospectus for investing in Vegas real estate, and at many places where potential conflict of interests may occur, the potential resolution is always favorable to you. I understand that the world is mostly about everyone for himself, and I respect that. But I would like to see such conflict of interests reduced or resolved in an investor-friendly way.
The Google founders’ logo is “do no evil”, which I have always thought as being too arrogant. Not only there are class A & B shares so that they can have the cake and eat it, the recent stock split is creating class C to proves again that the definition of “evil” to them is only when they are gods.
I do wish you the best success in your fund. But while an investor may enjoy the initial success of the fund, the inherent construct of the fund appears to me as less investor-friendly as it could be.
Withholding supplies and marketing has worked for the diamonds market. The US government is stronger than DeBeers. So why won’t it work for the US govt?
Remember, that RE is your home. It’s not just a house and piece of land that is perpetually taxed.
If not found any RE ads that has a home that included a wife and kids with a return policy.
LOL! If the banksters think for a moment that I’ll “rent” to save their a$$e$, they had best think again. Unless the rent is cheaper than everything around, I’ll pass and hope it sits empty for a few years.
I got to smile and laugh at my property manager the other day as she was getting some unfortunate vehicle towed. I made sure and tell her I was defaulting as well and no one can buy because so many people are behind on HOA payments. I can afford to make my HOA payments, but they pissed me off as well so they can pursue legal action….and then I’ll just pay the $2,000 to Chapter 13 and everyone can get pennies on the dollar.
Blowback is a biatch isn’t it?