States Push Back Against The FHFA’s REO To Rental Program

Despite the misgivings of many housing experts and distressed homeowners, the Federal Housing Finance Agency (FHFA) is pushing ahead with their other real estate owned (OREO) program. The OREO’s, better known as REO to rental properties, will be sold to large institutions who can rent them. However, at least one state is pushing back against the initiative.

Led by Congressman Gary Miller (R-Brea), the group sent a letter to Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), petitioning him to exclude homes in California from the pilot program of the REO Initiative, which aims to sell off REOs owned by the GSEs and HUD in bulk to institutional investors who will turn the properties into rental homes.

At least 600 REOs in Los Angeles and Riverside counties are slated to become part of the REO to rental program. But many real estate experts say that the program will actually harm the housing recovery by pushing more potential buyers into rentals.

“We commend the California congressional delegation’s letter to Mr. DeMarco,” said LeFrancis Arnold, C.A.R. president. “They clearly understand that this program may be a viable solution in states where there is a large inventory of unsold foreclosures. However, carrying out this plan in California would potentially further delay a housing recovery and, ultimately, result in greater losses for the taxpayer.”

But is it really a viable program? And will other states with large foreclosure inventories actually benefit from a rental program? As we have mentioned in previous articles, the REO to rental program will increase the number renters in this country and could possibly discourage homeownership. Lower homeownership rates can negatively impact communities and the rental model is unsustainable. But there is another problem; the REO to rental program will cost the taxpayers money. REOs sold to large financial institutions for rental will not garner the type of purchase price they could if they were on the open market. This could ultimately undercut ordinary buyers who want to actually live in the REO property they purchase. Furthermore, there is a risk that the institutions that own REO rentals will fail to truly serve the needs of the communities they serve.

The Federal Reserve issued a policy statement that urged large institutional buyers to comply with local, state and federal housing laws when renting; but who will police this massive project which could grow exponentially if it is expanded beyond the pilot stage?