John Burns Crafts Proposal for REO Rental Solution

Since the homebuyer tax credit expired in the spring, homebuying activity has slowed by more than 30 percent, and analysts aren't expecting much of a rebound any time soon.
[IMAGE] At the same time, the number of homes for sale has risen. ""Tuesday's report"":http://dsnews.comarticles/index/nar-reports-existing-home-sales-declined-22-in-october-2010-11-23 from the National Association of Realtors says there were 3.86 million existing homes available for sale at the end of October, which will take 10.5 months to clear at the current sales pace. Estimates of the shadow inventory of REO properties vary across the industry, ranging from an 8-month to nearly 3-year supply.

With lower demand and higher supply, ""John Burns Real Estate Consulting"":http://www.realestateconsulting.com/ (JBREC) says it is once again a buyer's market, where sellers are forced to drop the price if they want to sell.

""Falling home prices don't help anyone, and anyone who says we can let the free market take care of things is saying that it is ok for taxpayers and the banking system to lose many more billions of dollars, virtually assuring another recession and maybe worse,"" the California-based advisory firm said.

To boost housing demand and limit supply, JBREC has developed an REO rental housing proposal, with three key points.

*1) Create an Apartment REIT:* Distressed sales need to be kept off the market, and the best route for accomplishing this is to rent out REOs held by Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA), the company says. According to JBREC's analysis,

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these government-owned homes currently comprise 42 percent of the 562,000-unit REO supply and a large percentage of the 5.1 million homes currently in the foreclosure pipeline.

JBREC suggests the government agencies contract with an outside firm to manage local property management firms and turn their vacant foreclosed homes into viable rental properties. The company notes that the rental income would be self-sustaining and the properties would be financeable in the public markets, just like publicly traded REITs [real estate investment trusts] are financeable. The banks, who currently own 22 percent of the REO inventory, should also be allowed to contribute properties to the REIT, JBREC says.

*2) Loans to Landlords:* To stimulate demand and restrict supply on non-GSE distressed sales, JBREC suggests having Fannie and Freddie extend ""safe"" loans to individuals or corporations who agree to rent the properties out for an extended period of time. JBREC says the GSEs should make a tidy profit on these loans, while also helping provide affordable rental housing to those who need it.

*3) Keep Mortgage Liquidity Flowing:* JBREC notes that housing is extremely affordable right now, but the uncertainty in the mortgage industry is making underwriting more challenging, and uncertainty in the economy is hurting buyer confidence. The company says mortgage lenders and investors should ensure their underwriting rules are clear and consistent so borrowers know what is required, and a sound financing environment prevails.

""We believe that the solutions above will also help restore homebuyer confidence that prices won't plunge, which will boost demand,"" JBREC said.

Company officials spent time in Washington D.C. this month, and obtained meetings with HUD, Treasury, the Federal Reserve, Fannie Mae, and Freddie Mac to present their REO rental plan.

""We were pleasantly surprised at how much traction our proposal received"" as a means of alleviating the industry's problems of over-supply and price depreciation, JBREC said.