Viewpoints: Bulk sales of foreclosed homes are a bad solution for California
by LeFrancis Arnold, president of the California Association of Realtors.
Special to The Bee
Published Saturday, Feb. 25, 2012
Bad solutions often are born of good intentions.
Consider the federal government's proposal to rapidly and dramatically reduce the supply of newly foreclosed homes coming onto the market from Fannie Mae, Freddie Mac and the Federal Housing Administration through the bulk sale of foreclosed homes to Wall Street investors.
On the surface, it's a well-intentioned idea – and an experiment that may even prove to be a reasonable solution in states where there is a huge inventory of unsold foreclosures.
However, it's a terrible idea for most California homeowners, small investors, landlords and property managers, and an even worse idea for taxpayers. Unlike Detroit or Las Vegas, where entire neighborhoods of foreclosed homes sit empty month after month, bank-owned homes in most California communities already are closing in an average of only 60 days – and often above the list price – without government intervention. So strong are sales of foreclosures in our state that the overall inventory of properties has fallen to levels considered low even in a normal real estate market.
Nationwide, Fannie Mae, Freddie Mac and the FHA sold nearly 375,000 foreclosed homes over the past year, the vast majority through conventional sales to owner-occupants, mom and pop investors, or nonprofits. What's more, these homes are being sold through local real estate brokers and agents for an average discount of only 5 percent to 6 percent from the market price. Bulk sales are certain to bring a smaller percentage return.
So what's wrong with experimenting with bulk sales? In a real estate market as unique as California's, the disadvantages are enormous.
For one, the federal government isn't talking about selling groups of two, three, or even 10 or 12 homes. The bulk sales they propose would aggregate hundreds, if not thousands, of properties into investment pools of at least $50 million to be auctioned to the highest bidder. At that price, only large Wall Street investment syndicates, hedge funds and institutional investors – who have little to no interest in communities – are likely participants. Additionally, the winning bidder must agree to convert these homes into rental properties for an unspecified period of time, potentially further delaying a housing recovery.
Imagine the bailout that may be needed if this experiment in institutionalized property management doesn't pay off. And imagine what converting hundreds – or thousands – of homes into rentals might do to the rental market and home values.
Despite the potential for collateral damage in states like California, it is likely the federal government will carry out this ill-conceived idea.
Should the government choose to move forward, we urge regulators to take great care to avoid implementing this plan in communities where home prices could be further depressed, thus damaging individual homeowners, investors, landlords and property managers, as well as discouraging future individual and small-group investment.
In addition, investors should not be prevented from utilizing properties they purchase in the most efficient manner. That may mean allowing some or all of these homes to be sold, rather than forcing them to be rented for a period of time before being dumped back on the market. By allowing the marketplace to determine the best use of a property, the federal government will further encourage participation by local investors, preserve home values, minimize the cost to taxpayers and maximize the potential that Fannie Mae, Freddie Mac and the FHA will receive the greatest return on each property sale.
Finally, the federal government should take steps to enable small local investors to participate in bulk sales opportunities and thus retain a financial stake in their communities. For this to occur, and to encourage a diverse set of participants, investment pools should not exceed $5 million. The proposed sales range of between $50 million and $1 billion is simply too high to ensure either broad local participation or investor diversity.
Wall Street does not need another gift at the expense of taxpayers.
