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Feds look to stabilize market

Economy: Local experts discuss potential impact of federal effort to stem delinquencies, raise confi

Posted: January 15, 2012 1:30 a.m.
Updated: January 15, 2012 1:30 a.m.
 


Federal regulators are reportedly very close to announcing a pilot program in an effort to stabilize the housing market. If the details are flushed out,  government-owned foreclosures could be sold in bulk to investors as rental units.

Federal Reserve Chairman Ben Bernanke issued a white paper Jan. 2 to the Committee on Banking, Housing and Urban Affairs, saying declines in the housing market on the scale we see today are unprecedented since the Great Depression.

In the report, Bernanke said the surge of delinquencies has overwhelmed the housing finance system and that some of the incentives built into servicing mortgage contracts encourage foreclosures rather than modifications.

The ongoing depressed real estate market and substantial blow to household wealth via declining home values “has significantly weakened household spending and consumer confidence,” Bernanke said in the report.

There is a swollen inventory of homes held by lenders. Perhaps one-fourth of the 2 million vacant homes for sale in the second quarter 2011 were bank- or lender-owned properties.

Fannie Mae, Freddie Mac and the Federal Housing Administration together hold about half of the outstanding lender-owned inventory. The remaining inventory, a bit less than one-fourth, is held by commercial banks and thrifts.

More foreclosures are said to be in the pipeline after processing delays last year created massive backlogs of properties for which the foreclosure process has not yet started.

Markets vary

“When you look at our community, we don’t have blocks of homes getting so trashed that the entire neighborhood is lost,” said Diane Kauzlarich with Triple D Realty in Santa Clarita. “But I have to think that if done properly, it could be a good thing. Nationwide, there are so many very, very bleak areas and it has to help that.”

Indeed, the white paper does identify markets where large lender-owned inventories put communities at risk, specifically naming Los Angeles and Riverside.

Projecting a continued flow of new lender-owned properties will hit the market, the white paper estimated perhaps as many as 1 million properties per year in 2012 and 2013 will go into foreclosure, weighing on housing prices for some time.

Locally, however, some Realtors have complained of an inventory shortage for homebuyers.

“Our market is thirsty for inventory, and while we don’t need a flood of inventory, we need a little more to keep it stable and homebuyers hopes up,” said Cherrie Brown with Keller Williams VIP Properties.

Some of Brown’s clients are already faced with bidding wars.

Taking foreclosed properties off the resale market and converting them to rental units could negatively affect the Santa Clarita Valley market, Brown said.

“For the rest of the country, this may be a great program — but for our market, I only seeing it hurting (us),” she said.

Bulk sales

The pilot program under review is intended to lessen future waves of foreclosures.

A proposal is under way for a government-assisted program to turn foreclosed properties into rentals. Homes would be sold in bulk to investors, who in turn would manage the properties as rental units until the market recovers to the point at which the investors could sell the properties for a profit.

The number of U.S. properties currently in the foreclosure process is said to be more than four times larger than the number of properties in the existing lender-owned inventory, the white paper reported.

The white paper also reported, “As of September 2011, U.S. commercial banks had $10 billion in residential REO properties on their balance sheets, while savings and loans had an additional $1.4 billion.”

Locally, the market is believed to be healthier.

Inventory needed

RealtyTrac reported Thursday that U.S. foreclosure filings in December was the lowest monthly total since November 2007, a 49-month low. Lenders delayed starting foreclosure proceedings as they worked to clear up a prior mess involving robo-signing on loan documents.

If all of the homes begin flooding the market, existing home prices would continue trending downward, hurting the overall economy more.

The thinking is that the rental pilot program could contribute to the gradual recovery in housing markets with the aim of speeding the overall economic recovery.

“There are currently just over 700 bank-owned homes in Santa Clarita with another 1,000 set to go to auction,” Brown said.

Of the 1,009 active listings, which also include Castaic and Agua Dulce, 478 of the properties are short sales and 550 are not yet listed, Brown said.

“Only 151 of them are listed as bank-owned,” she said.

At issue for the design of the government program is determining what the potential of success is, how to price the homes low enough to be attractive to investors, but not so low that lenders will protest, how to manage the properties to maintain value and designing a plan for financing. Currently, no mortgage products exist for the sale of a portfolio of single-family homes.

Those working on the program know properties may remain as rental properties for an extended period, given the depressed state of the housing market. One of the ideas surfaced in the white paper is to create a rent-to-own plan in which renters might have the option to eventually purchase their rental property. This plan would encourage renters to maintain their properties.

The question for local Realtors is what impact the program would have on smaller investors.

Smaller investors

Institutional investors are said to be interested if the plan includes some kind of lending package that would allow them to finance their purchases and the banks agree to take bigger write-downs on the value of the homes.

“(The) local Santa Clarita investor cannot perform with the “big guns” of real estate investing,” said Connor MacIvor with
RE/MAX Realtors.

And, he added, if properties are sold in bulk it just might kill the local rental market.

“As a landlord myself, this now means when my properties go vacant, I have to compete with banks to rent out my properties,” Brown said.

In an ironic twist in any market correction, Brown said if too much rental inventory enters the market, forcing existing rental properties to sit vacant for too long, owners such as herself could end up facing foreclosure on properties.

“We have heard of this flood of inventory for years and have yet to see anything close to a flood,” Brown said.

But until the details of a plan are firmed up, no one is ready to weigh in with an opinion on the actual effects the program may have. At this point, most everyone is in a wait-and-see mode.

To read the white paper report, go online to:
http://federalreserve.gov/publications/other-reports/files/housing-white-paper-20120104.pdf.

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