Does this help or hurt the investor market and, more importantly, the recovery of the real estate market in general? Or does it just prolong the inevitable?

Federal Reserve Chairman Ben Bernanke supports the national REO rental program saying in a white paper to Congress on this issue that “although small investors are currently buying and converting foreclosed properties to rental units on a limited scale, larger-scale conversions have not occurred.”

He points to three reasons this has not occurred –

• Grouping properties geographically has proven difficult and because of this it’s hard to streamline fixed costs
• Financing is hard to obtain and the REO holders are losing money in bulk sales
• Regulators have “generally encouraged sales of REO property as early as practicable.”

But what happens when the government becomes landlord in chief?

Bernanke says that that because Fannie Mae, Freddie Mac and the FHA are currently holding half of the REO inventory, they “might be able to aggregate enough properties to facilitate a cost-effective rental program in many rental markets.”

Does this just prolong the issue of loss to help the market recover?

The white paper states, “Preliminary estimates suggest that about two-fifths of Fannie Mae’s REO inventory would have a cap rate above 8 percent–sufficiently high to indicate renting the property might deliver a better loss recovery than selling the property.”

That statement doesn’t tell us anything about how long this program will last. It doesn’t tell us the costs involved. Nor, does it tell us what effect this will have on the overall economy.

Sure, more renters will have places to live. But this doesn’t answer the long-term question. And the analysts firms disagree on what’s best, according to today’s HousingWire recap of the topic at the American Securitization Forum.

In Jacob Gafney’s report, Laurie Goodman, a managing director with Amherst Securities said this program “would result in a cottage industry devoted to third-party management of these properties.”

Barclays analysts disagreed and said the program “remains difficult to scale effectively and may not draw as much money as envisioned.”

So what does the white paper say about the success of the program?

• It offers several scenarios for how the program could work, but they also say “no such program currently exists, predicting its success of efficacy is difficult. Ongoing experimentation and analysis will be a crucial component of developing such a program.”
• Most of the properties held by Fannie Mae by “would have a cap rate above 8 percent.” This indicates that “renting the property might deliver a better loss recovery than selling the property.”
• The paper also suggests that home ownership is the best solution to this REO deluge. However, they also point out how difficult it is to get a mortgage in the current economic conditions.

So, what do you think? Would a national REO rental program help speed recovery or prolong it? Should the government go ahead and cut their losses and release the properties in bulk REO packages?

I read your article on portfolio lending and I couldn’t agree with you more about Fannie Mae. In fact, it isn’t just the residential market they’re messing up, it’s the multi-family market as well. I have been a real estate investor for over 15 years. I have been an investor in multi-family, namely apartment communities. I’m writing to you because I’d like to share our horror story with Fannie Mae and how true your words are about how inflexible and unreasonable they are.

I own a 160 unit apartment complex in the Dallas, Texas area with two other business partners. After a rough start, the property is operating fine now. In fact, last year it yielded a $322,000 NOI. Mind you, we bought this property for $3.2M at a cap rate of 9%, so we’ve done well. After financing, it returned $74,000, which we put back into the property.

The horror story starts last month. You see, Fannie Mae bought our loan from our original lender. Recently, they performed what they called a “Physical Needs Assessment” inspection. It’s completely based on the opinion of the inspector they hire. Then, they generated a report of items they believe should be fixed. This report has nothing to do with the realities of running a property. Cosmetic items are listed as “immediate needs” with price tags of $10,000 and up.

Now, Fannie Mae being Fannie Mae, a.k.a. unreasonable, decides to start foreclosure BEFORE any warnings and then notify us AFTERWARDS we have 30 days to put $140,000 into a repair escrow or else we lose the property. All this because we put our money toward more important things related to running a property, rather than their list in their report. Our negotiations with them only managed to lower this amount to $75,000 but they are still inflexible.

We are now in the process of looking for an investor that will invest some capital in return for a percentage of the property. The investor will stand to make a high return in a short time if we get our re-financing approved, or they have the option of holding on to their share until we sell for a larger return. We anticipate at least a $1M profit because we are in the process of converting this property’s utilities, which will increase revenues by over $100,000 annually. However, in the meanwhile, we’re stuck with Fannie Mae messing up a good thing.

So there you have it, the horror story that is Fannie Mae. A perfectly great loan, a perfectly good property, and perfectly good investment being ruined by Fannie Mae. In our experience, we couldn’t agree with you more, Fannie Mae has done more harm than good for the investors in the real estate market.

There are a couple of lessons here for all of us. 1) Always make sure you have some cash reserves from private lenders/investors waiting in the wings on all holdings like this and 2) always develop a relationship with a portfolio lender BEFORE you need them. This craziness from Fannie happened quickly and had this investor had a portfolio lender relationship established in advance, he would have saved a great deal of heartache.

The new program is for borrowers who don’t qualify for or haven’t been able to get a loan modification, according to Fannie’s news release. This includes investment properties with a tenant.

Under the Deed for Lease program, the borrower would transfer title to the property to the lender by completing a deed in lieu of foreclosure and then rent back the house at market rates — which hopefully will be cheaper than the mortgage payment on their current (or not-so current) loan. That’s a big bummer for foreclosure and REO investors but a progressive way to keep people in their homes.

Get more on the Fannie site here:

http://www.fanniemae.com

And one of the funniest recurring bits in the movie is when the air traffic controller played by Lloyd Bridges keeps having to deal with all these problems and makes cracks like … “Looks like I picked the wrong week to… quit drinking, smoking, sniffing glue… you get the point.

Well, today condo developers are in the same boat as Lloyd.

Fannie and Freddie decided to change the requirements for financing condos and let’s just say that it’s even tougher to buy a condo now than it is to be in charge of an Airplane where Mrs. Cleaver is speaking jive.

One of the new rules is that a buyer can’t qualify for a conventional loan unless the development is 70% presold – that’s up from 51%.

Geez.

Here’s a question for you Fannie and Freddie – do you actually want to make mortgage loans?

Fannie Mae and Freddie Mac are now regulating the appraisal business and, with their track record, I don’t think that’s who you want in charge.

Let’s talk about what this means to investors.

First Fannie and Freddie came after mortgage brokers putting the kibosh on most third party originations. Then they came after us real estate investors with the crazy rules on investor loans, LLC’s, stated income and cash out refinances. Now, they’re coming after independent appraisers.

This law requires all appraisers to join Appraisal Management Companies (AMC’s), where they’re forced to give up 40% or more of their income. My favorite appraiser, Chris Shannon, says that the AMC’s are hiring young, inexperienced appraisers who are willing to work for 60% of normal wages. Oh, and guess who owns the AMC’s? An independent third party? Nope, the LENDERS.

It doesn’t take a rocket scientist to figure out what will happen to the quality of appraisals. Not  to mention the values on investment properties.

Appraisers are also no longer allowed to have any contact with mortgage brokers. When I ran my mortgage company, I worked with Chris exclusively because he understood our business.

Most of the conventional loans we did were rehab loan takeouts and the lenders *hated* them. They were always cutting our values arbitrarily or denying the loan because of a rapid increase in value. Um, yeah, there’s going to be a rapid increase in value if you’re spending $50-$60K to REHAB a house!

Chris always did a great job of supporting his comps and providing a well-documented rebuttal. That won’t happen anymore. One strike and you’re out, investors.

Also, mortgage brokers can no longer choose the appraiser they want. They’re not even allowed any contact with the appraiser. Only the lender is allowed contact with the appraiser. So, as Chris said, the 20 years that he spent building up his relationships with brokers to get business is now *poof* gone with the wind. It’s now illegal for them to even contact him. This is nuts, guys.

Oh, and since the appraisal won’t be in the mortgage broker’s name, you can’t have it reassigned. If you need to change lenders (for any reason including value issues) you’ll need to get and pay full price for a completely new appraisal! This will increase your costs, delay the loan closing and cause a ton of frustration on all sides. Hope the appraiser that your new lender chooses isn’t too backed up with orders – your earnest money is at risk!

Fannie Mae and Freddie Mac have lost billions of dollars in the last few years, so it’s no wonder they want to manipulate the market and have more control. But is this really the way to do it? By adding a level of bureaucracy and knocking independent appraisers out of the industry?

Here’s a 25 minute call I recorded with Chris Shannon about HVCC. Hear his opinion and how he thinks it will affect YOU!

Be sure and leave a comment and let me know what you think about the HVCC.