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Recovery Through REO

DSN-story_reoThe market may have bounced back, but with housing inventory tighter than ever, many underserved communities are getting pushed out of the market. Does the REO industry have what it takes to inch these areas further toward recovery? Editor's note: This select feature originally ran in the October issue of DS News, click here to view the full issue.

By pretty much every measure, we are well into the recovery from the real estate crash that began in the United States in 2007 and subsequently spread around the world. According to IMF’s Global House Price Index, an average of real house prices across 57 countries, the index has increased in each of the past 16 quarters. While prices have not yet recovered to pre-crash levels—even in countries situated in the “boom” sector, we’re getting there. Well, at least most of us are.

There are still many around the world for whom housing is either not available or too expensive. The IMF puts these countries in its “gloom” sector. In America, we find these consumers living primarily in our larger cities. Efforts are underway now to help the hardest hit of these urban areas recover. The lessons we’re learning in our own cities will change the way the rest of the world deals with the critical human need of housing in the future.

A big problem in big cities

Some of our larger cities are facing a critical shortage of housing—especially low-income housing. According to CityLab, America is currently suffering through an affordable housing crisis, with no county spared. But it’s our large urban areas that are faring the worst. While rural areas currently have 62 low-income units available for every 100 low-income renting households, our cities only have 42 units per 100 families.

To make matters worse, our cities are growing. According to the U.S. Census Bureau, the nation’s urban centers grew by 1.03 percent in 2015—nearly twice as fast as they grew in the first decade of this century. Unfortunately, this growth is coming at the expense of many of our nation’s low-to-moderate income earners, who have been shut out of the housing market by high rents (leaving them little to save for a down payment on a new home), low inventory, and insufficient access to credit. They are moving to the cities, but where will they live?

If rents are too high, the solution may be to convert more of these new residents into homeowners. In fact, that’s what the nation’s largest secondary market investors are hoping will happen. New mortgage loan products now exist that allow qualifying new homeowners to secure a loan with a very low down payment—if they can find a home to buy in the first place.

According to Realtor.com, a number of cities made it through the downturn thanks to investors who were willing to step in, rehabilitate homes, and then resell them into the market for a profit. Nashville, Tennessee; Denver; Tampa, Florida; Phoenix; and New Orleans all made the publication’s top 10 list of cities for home flipping. But what happened to the real estate in other urban areas that investors didn’t find as promising?

Without investors to step in and buy up distressed assets, the cities ended up taking those properties back, many at auction for overdue property tax. Hundreds of homes in cities around the country have been bulldozed down in the hope that the land beneath them might attract investors. Meanwhile, families there keep looking for homes to buy.

The missing link

Traditionally, it has been the community-based organizations working in our cities to guide new residents and renters into the ranks of homeowners. Credit availability has only recently loosened to the point that significant numbers of these underserved prospective borrowers can be served. Now, the problem is finding them homes to buy.

It’s not that the homes don’t exist. They do. It’s just that, for many of these cities, the municipality has taken back the property but does not have the technology solution available to effectively outsource the marketing and management to make it move-in ready. The cities would love to make this happen, as more homeowners increases the tax base and rebuilds communities. 

At the same time, there are construction contractors, many that are minority-, woman-, and veteran-owned, who would love to have the work of rehabilitating these properties if someone would only hire them to do so.

We’ve already mentioned that investors are creating loan products that can meet the needs of these borrowers. It seems that all of the pieces are in place to help communities rebuild, but something is keeping them all from coming together. In addition, if the investors that have served other cities by buying and flipping distressed real estate could be enticed to enter these cities, they could help or at least bring a welcome source of liquidity to provide rehabilitation loans.

In some ways, it’s like having all of the parts for a high-performance engine lying on the workbench. Until you put them together, you’re not going to get anywhere. Just as the engine is the technology that operates the vehicle, cities need a technology that can serve as the engine for revitalization.

Tapping into the right tech

Regardless of the “engine,” we find that revitalizing our urban areas will require capital for fuel. Until cities or their residents have access to this capital, they cannot rehabilitate the real estate that cities already own. But to bring their capital to these cities, investors will demand access to better information about how their funds are being invested.

The first requirement of the engine is full transparency. Today’s community-based organizations do not have access to technology that offers a task-based automated workflow, access to a network of service providers, and the reporting capabilities these investors will require, even though it is available today. 

What we need is some technological hub that would allow real estate owners (municipalities and others) to interact with lenders (who bring the fuel) to provide funding to residents. Those residents would then work with community-based organizations to become prepared for homeownership, as well as professional asset managers who, through the efforts of local construction companies, would rehabilitate properties for them to buy.

To work, it will take all of the parties working in tandem—and until they are all interacting on the same technology platform, they won’t have the transparency to know who is doing what as they work together toward the goal.

Of course, it will take more than a transparent project management platform to achieve the goal. Compliance requirements will mandate the use of a professional real estate asset management platform with built-in safeguards to keep the project on track in a fully compliant manner.

Technology development is our area of expertise. We know that good real estate disposition software could easily empower any party to the transaction, such as a nonprofit organization, by giving them the power to connect to the other required parties and guide the project to completion. It would, in effect, transform these organizations from charities to legitimate real estate business partners who have real opportunities to share with investors, construction companies, community governments, and residents who want to become homeowners.

Learning our lesson

Could something like this work, bringing so many parties together, each with their own objectives, and guide them to a mutually beneficial outcome? It’s happening today in cities around America. Software like this exists today and was instrumental in helping the nation’s mortgage loan servicers move hundreds of thousands of properties back into the market after foreclosure. It is now being used to help cities attract the capital they need to revitalize their communities.

In time, we will see the American homeownership levels return to pre-crash levels, in part due to the efforts in our cities to rebuild their lost communities. They’ll use a system like the one we’ve described to bring all of the required parties together. As they do, they’ll be providing a valuable lesson to cities around the globe that may one day allow them to follow suit, attracting capital and expertise to improve their own urban areas as well.


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