REO Could Become A Serious Problem For HUD/GSEs

the housing crisis unrolled the Department of Housing and Urban
Development (HUD) and the two government sponsored enterprises (GSEs)
Freddie Mae and Fannie Mae came into possession of more and more
properties thorugh foreclosure. As of
September 30, 2012, HUD held 37,445 foreclosed properties (REO) while
the GSEs held 158,138. In addition, the “shadow
inventory”-residential loans at least 90 days delinquent-totaled 1,708,033 properties, roughly 8.7 times the size of the HUD and GSE
REO inventories combined. Even a fraction of the shadow inventory
falling into foreclosure could considerably swell HUD and GSE
inventories of REO properties.

Because of the
volume of this current and potential REO the Offices of Inspector
General (OIG) for both HUD and the Federal Housing Finance Agency
(FHFA) (conservator of the GSEs) recently produced a report on how
HUD and the GSEs are managing and disposing of it.

HUD and the GSEs
have created infrastructures to manage and sell their REO and, while
these differ among the entities, all involve the use of extensive
networks of contractors
to perform management tasks to: secure
properties to avoid theft, vandalism, and unauthorized use;maintain
and repair properties as needed;price
properties appropriately through broker price opinions or appraisals
and satisfactory promotional efforts; and sell
properties to homeowners or investors within a reasonable period.

    Long before the
    housing crisis, HUD outsourced the disposition of its REO inventory to
    private contractors under its Management and Market (MM)
    program. These contractors are responsible for property activity
    both pre- and post-conveyance, property management, marketing,
    accounting and reconciliation, and oversight monitoring. Disposition
    of the REO is administered through Homeownership Centers in Atlanta,
    Denver, Philadelphia, and Santa Ana, each of which is responsible for
    a given geographic area.

    Without getting into
    the alphabet soup of HUD management, a manager is assigned to each
    property to inspect and clean out the property and order an
    appraisal. If the property is cleared for sale it is listed for 180
    and if not sold within this time frame is offered to local
    . If there is an acceptable offer the manager does the
    necessary title search and other work and clears it for closing.

    GSEs also manage their REO in inventories using a series of

    • Asset
      management firms which direct certain
      REO contractors in the performance of day-to-day property management
    • Real
      estate brokers who may, in addition to their marketing
      responsibilities, manage portions of the REO inventory.
    • Attorneys
      who manage evictions, title issues, and the closing process.
    • Property
      maintenance companies and repair contractors who do essential
      cleaning, repairs, and maintenance.

    • Appraisers
      and broker price opinion firms which help the GSEs determine the
      value and listing prices of the properties.

    the burden of managing these REO inventories is significant enough,
    the GSEs and HUD must also pay attention to their “shadow
    ,” that is properties with mortgages more than 90 days
    delinquent but which are not yet in foreclosure which, as stated
    above, have the potential to exponentially expand those inventories.


    and the GSEs have taken several steps to shrink their REO
    . FHA, HUDs housing agency, uses its
    Office of Assets Sales which was established in 2001 to coordinate
    disposition of single family and multifamily mortgage notes. These
    note sales began as a pilot in 2010 and have resulted
    in the sale of nearly 2,400 single family loans as of April 2013.
    Notes are sold competitively at a market-determined price generally
    below the outstanding principal balance to purchasers who agree to
    delay foreclosure for at least six months. This allows the borrower
    a chance to get help from the loan servicer to avoid foreclosure.

    September 2012, FHA enhanced the program to include pools of
    expanded size and use criteria; the revamped program is referred to
    as the Distressed Asset Stabilization Program. The first offerings
    from the Distressed Asset Stabilization Program occurred in September
    2012 with the latest offering conducted in March 2013. As of April
    2013, the program has resulted in the sale of nearly 26,000
    . Another offering is planned for June 2013 with an
    anticipated sale of 15,000 to 20,000 loans.

    February 2012, FHFA directed Fannie Mae to launch a pilot REO
    disposition program
    and bids were solicited from qualified investors
    to purchase and then rent for a specified period about 2,500 of its
    foreclosed properties in geographically concentrated areas across the
    country. Investors were qualified to bid after an extensive review
    of their financial strength, asset management experience and local
    expertise. FHFA has targeted especially hard hit areas such as
    Atlanta, Phoenix, and parts of Florida for the program and several
    rounds of successful sales have been conducted.

    FHFA OIG said that since becoming their conservator FHFA has
    consistently listed the large inventories of the GSEs as a critical
    concern yet did not conduct targeted examinations or other focused
    reviews until 2011. FHFA-OIG subsequently audited FHFA’s oversight
    of the GSE’s REO management and marketing and found they had taken
    positive supervisory steps but needed to supplement these in the
    future with more comprehensive risk assessment of, for example, the
    shadow inventory.

    says it plans future assessments of the REO management process
    including matters such as securing the property, maintenance,
    valuation, marketing, and sale and is considering several evaluations
    of FHFA’s oversight of the GSE’s REO activities with a focus on their
    ability to handle future workloads and mitigate adverse effects on
    homeowners and communities.

    OIG will also assess Fannie Mae’s pilot REO program if FHFA decides
    to implement the sale-rental model on a wider scale. That assessment
    may include whether the program is achieving its expected outcomes
    and whether it is more cost effective to proceed with the model
    rather than make sales through the traditional retail channel. OIG
    may also look at the qualities of the controls to vet potential
    and the GSEs’ compliance with the controls and their
    monitoring and enforcement of investor compliance with the programs

    also plans to assess FHFA’s oversight of single-family property
    at the GSEs, which are required at various points in the
    mortgage servicing process, including upon delinquency, in
    foreclosure, and while managing and disposing of REO. These
    inspections should determine the overall condition of the property,
    security of the house, occupancy status, maintenance and capital
    repair requirements, neighborhood conformity, and other related
    information. Inspectors must be qualified to perform the

    this audit and evaluation strategy, FHFA-OIG believes that it will be
    well positioned to determine whether FHFA is monitoring the GSEs’
    to mitigate REO risks and costs and the negative impacts of
    foreclosures on communities and to evaluate the effectiveness of the
    controls associated with the REO pilot program controls.

    OIGs’ report concludes by saying that REO management and disposition
    are challenging tasks and are likely to become more so as shadow
    inventory becomes REO and substantial attention must continue to be
    paid to the manner in which HUD, FHFA, and the GSEs handle such

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