AN EXAMINATION OF THE FEDERAL

HOUSING FINANCE AGENCYS REAL

ESTATE OWNED (REO) PILOT PROGRAM

FIELD HEARING
BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES
OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION

MAY 7, 2012

Printed for the use of the Committee on Financial Services

Serial No. 112120

(
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON

75726 PDF

2013

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 5121800; DC area (202) 5121800
Fax: (202) 5122104 Mail: Stop IDCC, Washington, DC 204020001

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00001

Fmt 5011

Sfmt 5011

K:\DOCS\75726.TXT

TERRI

HOUSE COMMITTEE ON FINANCIAL SERVICES

SPENCER BACHUS, Alabama, Chairman
JEB HENSARLING, Texas, Vice Chairman
PETER T. KING, New York
EDWARD R. ROYCE, California
FRANK D. LUCAS, Oklahoma
RON PAUL, Texas
DONALD A. MANZULLO, Illinois
WALTER B. JONES, North Carolina
JUDY BIGGERT, Illinois
GARY G. MILLER, California
SHELLEY MOORE CAPITO, West Virginia
SCOTT GARRETT, New Jersey
RANDY NEUGEBAUER, Texas
PATRICK T. MCHENRY, North Carolina
JOHN CAMPBELL, California
MICHELE BACHMANN, Minnesota
THADDEUS G. McCOTTER, Michigan
KEVIN McCARTHY, California
STEVAN PEARCE, New Mexico
BILL POSEY, Florida
MICHAEL G. FITZPATRICK, Pennsylvania
LYNN A. WESTMORELAND, Georgia
BLAINE LUETKEMEYER, Missouri
BILL HUIZENGA, Michigan
SEAN P. DUFFY, Wisconsin
NAN A. S. HAYWORTH, New York
JAMES B. RENACCI, Ohio
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO QUICO CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

BARNEY FRANK, Massachusetts, Ranking

Member
MAXINE WATERS, California
CAROLYN B. MALONEY, New York
LUIS V. GUTIERREZ, Illinois
ZQUEZ, New York
NYDIA M. VELA
MELVIN L. WATT, North Carolina
GARY L. ACKERMAN, New York
BRAD SHERMAN, California
GREGORY W. MEEKS, New York
MICHAEL E. CAPUANO, Massachusetts
N HINOJOSA, Texas
RUBE
WM. LACY CLAY, Missouri
CAROLYN MCCARTHY, New York
JOE BACA, California
STEPHEN F. LYNCH, Massachusetts
BRAD MILLER, North Carolina
DAVID SCOTT, Georgia
AL GREEN, Texas
EMANUEL CLEAVER, Missouri
GWEN MOORE, Wisconsin
KEITH ELLISON, Minnesota
ED PERLMUTTER, Colorado
JOE DONNELLY, Indiana
CARSON, Indiana
ANDRE
JAMES A. HIMES, Connecticut
GARY C. PETERS, Michigan
JOHN C. CARNEY, JR., Delaware

JAMES H. CLINGER, Staff Director and Chief Counsel

(II)

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00002

Fmt 5904

Sfmt 5904

K:\DOCS\75726.TXT

TERRI

SUBCOMMITTEE

ON

CAPITAL MARKETS

AND

GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman

DAVID SCHWEIKERT, Arizona, Vice
Chairman
PETER T. KING, New York
EDWARD R. ROYCE, California
FRANK D. LUCAS, Oklahoma
DONALD A. MANZULLO, Illinois
JUDY BIGGERT, Illinois
JEB HENSARLING, Texas
RANDY NEUGEBAUER, Texas
JOHN CAMPBELL, California
THADDEUS G. McCOTTER, Michigan
KEVIN McCARTHY, California
STEVAN PEARCE, New Mexico
BILL POSEY, Florida
MICHAEL G. FITZPATRICK, Pennsylvania
NAN A. S. HAYWORTH, New York
ROBERT HURT, Virginia
MICHAEL G. GRIMM, New York
STEVE STIVERS, Ohio
ROBERT J. DOLD, Illinois

MAXINE WATERS, California, Ranking

Member
GARY L. ACKERMAN, New York
BRAD SHERMAN, California
N HINOJOSA, Texas
RUBE
STEPHEN F. LYNCH, Massachusetts
BRAD MILLER, North Carolina
CAROLYN B. MALONEY, New York
GWEN MOORE, Wisconsin
ED PERLMUTTER, Colorado
JOE DONNELLY, Indiana
CARSON, Indiana
ANDRE
JAMES A. HIMES, Connecticut
GARY C. PETERS, Michigan
AL GREEN, Texas
KEITH ELLISON, Minnesota

(III)

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00003

Fmt 5904

Sfmt 5904

K:\DOCS\75726.TXT

TERRI

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00004

Fmt 5904

Sfmt 5904

K:\DOCS\75726.TXT

TERRI

CONTENTS
Page

Hearing held on:

May 7, 2012 .......................................................................................................
Appendix:
May 7, 2012 .......................................................................................................

1
43

WITNESSES
MONDAY, MAY 7, 2012
Burns, Meg, Senior Associate Director, Housing and Regulatory Policy, Federal Housing Finance Agency (FHFA) ................................................................
Dobson, Sean, Chief Executive Officer, Amherst Holdings ..................................
Grossinger, Rob, Vice President, Community Revitalization, Enterprise Community Partners, Inc. ...........................................................................................
Kenney, Mary R., Executive Director, Illinois Housing Development Authority
(IHDA) ...................................................................................................................
Pruess, Dick, on behalf of Community Associations Institute (CAI) ...................
Stegman, Michael, Counselor to the Secretary of the Treasury for Housing
Finance Policy, U.S. Department of the Treasury ............................................

5
24
26
28
31
6

APPENDIX
Prepared statements:
Burns, Meg ........................................................................................................
Dobson, Sean .....................................................................................................
Grossinger, Rob .................................................................................................
Kenney, Mary R. ...............................................................................................
Pruess, Dick ......................................................................................................
Stegman, Michael .............................................................................................

(V)

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00005

Fmt 5904

Sfmt 5904

K:\DOCS\75726.TXT

TERRI

44
50
58
68
80
103

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00006

Fmt 5904

Sfmt 5904

K:\DOCS\75726.TXT

TERRI

AN EXAMINATION OF THE FEDERAL

HOUSING FINANCE AGENCYS REAL
ESTATE OWNED (REO) PILOT PROGRAM
Monday, May 7, 2012

U.S. HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON CAPITAL MARKETS AND
GOVERNMENT SPONSORED ENTERPRISES,
COMMITTEE ON FINANCIAL SERVICES,
Washington, D.C.
The subcommittee met, pursuant to notice, at 8:38 a.m., in room
2525 of the Everett M. Dirksen U.S. Courthouse, 219 South Dearborn Street, Chicago, Illinois, Hon. Scott Garrett [chairman of the
subcommittee] presiding.
Members present: Representatives Garrett and Schweikert.
Also present: Representatives Huizenga and Schilling.
Chairman GARRETT. Good morning, and welcome. Todays field
hearing of the Subcommittee on Capital Markets and Government
Sponsored Enterprises, on the examination of the Federal Housing
Finance Agencys Real Estate Owned (REO) Pilot Program, is
called to order. I welcome my colleagues and members of the first
panel, and management members of the subsequent panels, as
well.
I will begin by recognizing myself for an opening statement. Welcome, everyone. I appreciate the fact that a number of you, myself
included, had a difficult time getting here to Chicago on this beautiful day. I guess this is a beautiful day for Chicago. I appreciate
that. Thats just what I hear about the weather in Chicago.
Mr. HUIZENGA. Its not raining enough.
Chairman GARRETT. I appreciate everyone traveling so far. Were
just now coming up on, just a couple of months from now, I guess,
the fourth anniversary of the two GSEs, Government Sponsored
Enterprises, Fannie Mae and Freddie Mac, being put into conservatorship.
As we approach this significant deadline, we recognize that it has
been done with a cost, the ongoing balance upwards of $180 billion,
and that number, of course, is expected to grow significantly over
the next several years. Currently, the American taxpayer is footing,
obviously, the bill for all this, and theyre also doing so while backing over 90 percent of the mortgage market right now. Put those
two statistics together and its undeniable that this is an
unsustainable situation in which we find ourselves.
And so, it is fitting and its appropriate that we come here for
a hearing such as this, to try and figure out how we go forward
(1)

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00007

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

2
in trying to take the American taxpayer off the hook, in part by
reducing the risk and the burdens of the GSEs, and also by reducing the assets that they have, and to figure out, also, how we can
wind these entities down.
This is not just a message that we have, but also a message that
the Administration has communicated they would like to see, as
well. So, the purpose of todays hearing is to further examine the
FHFA and their REO program, Real Estate Owned program. And
its a pilot program they have, that began last year. What is it designed to do? Its designed to determine the best ways, if you can,
to come up with, to do this not just in the pilot programtheyre
just doing a small programbut to do it in a much larger program,
bulk sales. And youre selling these not just to regular investors,
but to rather significant investors who will then take those assets
and manage them and service the properties and then rent them
out to local residents. From looking into this and from talking to
people involved with this, this is not a simple matter all by itself;
its a fairly complicated procedure. There are going to be many
questions and Im glad that we have the witnesses here on the
panel today who have a background in this. Well probably go into
some detail with you on some questions.
You run through the list and its a who, what, when, where, and
how sort of list of questions. The first one, I guess, is the who,
and that is the investors. Who are the investors, what is the level
of interest that they have in these new, sort of, asset classes?
The what is the standards that were going to be using. What
are the standards that we should be applying to the who, the investors, in order to become an eligible buyer in this marketplace?
The how is how you maximize the value of the property and receive market value when youre selling in bulk. See, Im just throwing these out on a large scale and not getting a fair return to the
GSEs. How also is how are all of these assets, all of these properties, going to be managed over time to make sure that theyre appropriately managed?
Going back to the what, what role does the government put by
community groups, the nonprofit groups, in the local areas of play,
depending on these areas?
And, again, the how, how can private institutions that have
REO portfolios use this as a potential model thats out there? We
would have to look at them and say, thats the way we should be
handling this, thats the way we can deal with it. So, thats a few
of the questions, and my colleagues are going to have a lot more
questions than that. I look forward to learning the answer to these
and many more.
As I said, I have talked to folks who were involved in this, in
similar-type programs. They do offer significant potential, but they
also offer potential risk, as well. And so, its critical that we do it,
but its critical that we get it right. There is, obviously, a significant amount of inventory, in the shadow inventory that currently
exists. But we want to make sure that we do it in a way that maximizes the return, if you will, to the taxpayer.
Im hopeful that an efficient, cost-effective strategy or disposition
of the property can decrease the risk of these entities, maximize

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00008

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

3
the value for the taxpayers, and help the housing market in these
hardest-hit areas that were examining.
One other thing, is that I just wanted to thank Congressman Bob
Dold for his work: first, for facilitating the hearing that were having here today; and second, for the lead that he has taken in this
important area, and for the hard work that he has put into the
whole general area of housing and what we can do in the housing
markets. He has been a significant contributor to this topic for myself and this committee. As you may know, since he is playing all
those roles, he was going to be with us here today, but unfortunately, very sadly, he has recently had a death in his family and
so was not able to be with us. But we will continue to look forward
to his involvement as this issue proceeds.
One last note, and that is to Director DeMarco, since were on
the record, and I have said this before, I would just like to commend him for his work and his achievements in this area and other
areas over there at the FHFA. I know he comes under significant
pressure on both policy and politics, and I think he has done a very
outstanding job in the role that he has; it is a very difficult role
that he has. He did not succumb to those political pressures, but
instead realized that he has to, and has, lived up to his requirements, the statutory requirements and what is in the law, and that
is to stand between those pressures and the American taxpayer,
who would be on the risk otherwise, if he was not doing the fine
job that he is doing. So, carry that message back, if you would.
With that, I yield back my time, and just at the opportune time,
I will yield to Mr. Schilling. Thank you for joining us.
Mr. SCHILLING. You bet. Its an honor to be here. Im sorry I was
running a few minutes late; I got caught downtown. I am looking
forward to hearing from you folks and then asking some questions.
So, thank you for allowing me to participate.
Chairman GARRETT. I now recognize Mr. Huizenga.
Mr. HUIZENGA. Im Bill Huizenga from Michigan; leave it to the
Michigan guy to always carry a map. My district is over on the
west side of the State, and hopefully a number of my Chicago
friends here will come and visit us on the west side of Michigan
as often as my wife and I come down and enjoy Chicago.
This topic is very much of interest to me. My professional life
prior to being involved in politics was in real estate developing. My
family has a small construction company over in Michigan. And
any time were talking housing, it has ramifications and impacts
for, frankly, everyone around the county. I, too, am very interested
in seeing how we are going to unwind some of these things.
I often have brought up that in my time, starting in the late
1980s and early 1990s in real estate, getting an FHA loan or a
Fannie Mae or Freddie Mac loan was fairly unusual. It was quite
unusual, in fact, in our area. You needed to own your lot or you
needed to have 20 percent down. And 20 percent became 15, became 10, became 5, became 0, became 120 percent loan to value,
and here we are. We found ourselves in some situations that, on
one hand, we havent been able to control, and on the other hand,
there have definitely been inputs from us as policymakers and
things that have happened in the past that have influenced and affected that. And Im here to help try to figure that out.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00009

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

4
As the chairman was sayingand I want to commend Chairman
Garrett for his leadership on this and many other issueswe are
looking at how we are going to make sure that while we are
transitioning back away from the current roles that we have, how
were going to do this in a way that makes sense and doesnt do
further harm. And we have sort of a political Hippocratic Oath
here, First, do no harm, to which we need to adhere.
So, with that, I yield back, Mr. Chairman, and I thank you for
the opportunity to be here today.
Chairman GARRETT. And I appreciate you being here, as well.
Before I yield to the gentleman from Arizona, I would like to take
this time to thank the Judge for facilitating the use of this courtroom. My first job out of law school was as a clerk to a U.S. Magistrate, and I learned those guys are very protective of their courtroom. And rightfully so. So, its a privilege and an honor to be able
to be here, and to have the use of the courtroom, as well. Were all
very much appreciative of that.
And with that, I yield to the gentleman from Arizona.
Mr. SCHWEIKERT. Ms. Burns, in your testimonyplease understand, I may be one of the more aggressive Members of Congress
on this particular subject. I look at whats going on in my market
area, which is Maricopa County, Arizona, one of the largest counties in the United States. And youre going to hear me say this 2
or 3 times: If you go to our multiple listing service, we have less
than a 5-week supply of homes $250,000 or less. Theres demand
and hunger, but yet our REO pipelines are inefficient and arent
working. And I appreciate wanting to do a pilot program, but the
size of this pilot program is heartbreaking. It does not put out
enough product to do, I believe, true price discovery.
Hopefully, youre seeing that with folks who are becoming qualified bidders. If you truly have 200, 300, 400, or 500 qualified bidders, you understand you have a demand out there. I am very
happy that, from what Im picking up, you are going to do different
sized packages to find the price discovery. And when we get to
questioning, I want to walk through some of those mechanics there.
But, in your testimony, and this may be outside your written area,
share with us when youre going to loosen up this pipeline.
There are 2,500 properties, and youre sitting on a couple hundred thousand, and there are at least that many more in the pipeline. This does not satiate your problem or the demand on the
other side. Thank you, Mr. Chairman.
Chairman GARRETT. And now, well turn to our first panel. We
have Ms. Burns and Mr. Stegman with us today. Ms. Burns is the
Senior Associate Director for Housing and Regulatory Policy at
FHFA, and Mr. Stegman is Counselor to the Secretary of the
Treasury for Housing Finance Policy at the U.S. Department of the
Treasury.
We will begin with you, Ms. Burns. And we welcome you with
all of your trials and tribulations that you had to get here. As always, your full statement will be made a part of the record, and
we will recognize you for 5 minutes to give an oral summary.
Thank you.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00010

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

5
STATEMENT OF MEG BURNS, SENIOR ASSOCIATE DIRECTOR,
HOUSING AND REGULATORY POLICY, FEDERAL HOUSING FINANCE AGENCY (FHFA)

Ms. BURNS. Chairman Garrett and members of the subcommittee, thank you for inviting me here today to testify on the
Federal Housing Finance Agencys Real Estate Owned Initiative. I
am Meg Burns, Senior Associate Director for the Office of Housing
and Regulatory Policy at FHFA and I am responsible for managing
this project.
As you know, since 2008 FHFA has served as the conservator to
Fannie Mae and Freddie Mac, a responsibility that the Agency
takes very seriously. FHFA has focused on minimizing losses to
both companies through tighter underwriting standards, more accurate pricing of risk, and aggressive loss mitigation strategies.
My remarks today will focus on a particular loss mitigation effort, the REO-to-Rental pilot, which was designed to test a new approach to property disposition. The goals of this pilot are narrowly
targeted.
One, to gauge investor appetite for a new asset class, that is
scattered-site, single-family rental housing.
Two, to determine whether the disposition of properties in bulk,
as opposed to one by one, presents an opportunity for well-capitalized investors to partner with local organizations to engage in profitable yet civic-minded approaches to improve market conditions.
Three, to assess whether the model can be replicated by other financial institutions.
Now, for the status of the pilot. We are well into the first transaction, announced in February. Included in the first sale are approximately 2,500 properties divided into 8 subpools, located in Las
Vegas, Nevada; Phoenix, Arizona; various parts of Florida; Riverside and Los Angeles, California; Atlanta, Georgia; and here in
Chicago, Illinois. There are several steps to the process:
prequalification; due diligence; qualification; bidding; and award.
We are now at the qualification stage.
Immediately following the February announcement, interested
investors were asked to prequalify by certifying to their financial
capacity, market experience, and obligation to follow the transaction rules. Those who prequalified were then eligible to post a security deposit to review detailed asset level information, and to
submit an application to qualify to participate in the auction. Evaluation of those applications is now under way.
The application process is comprehensive, rigorous, and demanding, requiring exhaustive amounts of information and documentation from the applicants and their business partners. Only those investors who have sufficient capital and operational expertise will
make it past the scrutiny of the reviewers. The application requires
that the investors describe their previous experience managing single-family rental assets from marketing to leasing to maintenance.
How relevant, extensive, and recent that experience was will matter in the scoring.
In addition, the applicants must detail their plans for operating
a first-rate rental program with these particular properties. They
must explain how they would rely on local and regional organizations to tailor their programs to meet the needs of residents in

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00011

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

6
these communities. There is an expectation that local construction
and repair companies will be engaged due to their familiarity with
State and local building codes, that local property management
firms will bring knowledge of potential tenant population in the
area and the best means of marketing to these citizens, and that
community-based nonprofits may provide supportive services to the
residents.
This rigorous application process is intended to narrow the pool
of eligible bidders to those who have financial and operational expertise, but also the mission-oriented commitment to ensure that
this program brings capital to markets in need in a way that stabilizes communities.
Currently, the independent third party that was hired to review
the applications is busy rating and scoring, a process that will be
completed in the next few weeks. After that, eligible bidders will
be notified and the bid process will begin. FHFAs goal is to complete this first pilot transaction in the next few months.
To recap, the REO-to-Rental Initiative is a pilot, a test to see
whether an alternative disposition strategy can complement existing sales efforts, generating private investment in single-family
rental housing in a way that is both efficient and effective at stabilizing local markets.
I thank you for the opportunity to testify today, and I look forward to your questions.
[The prepared statement of Ms. Burns can be found on page 44
of the appendix.]
Chairman GARRETT. Thank you.
Next, Mr. Michael Stegman, Counselor to the Secretary for Housing Finance Policy. Thank you.
STATEMENT OF MICHAEL STEGMAN, COUNSELOR TO THE
SECRETARY OF THE TREASURY FOR HOUSING FINANCE
POLICY, U.S. DEPARTMENT OF THE TREASURY

Mr. STEGMAN. Thank you, Chairman Garrett, and members of

the subcommittee. Thank you for the opportunity to testify this
morning.
Prior to joining the Department of the Treasury as Counselor to
Secretary Geithner for Housing Finance Policy 4 months ago, I
worked on housing policy in various capacities over the course of
a long career. Most recently, I was the director of policy and housing at the John D. and Catherine T. MacArthur Foundation
headquartered here in Chicago. Before that, I spent much of my career as a professor of city planning and public policy at the University of North Carolina at Chapel Hill. During my 40-year tenure at
UNC, I twice took leave to serve in the Carter and Clinton Administrations as a senior official at the U.S. Department of Housing
and Urban Development.
Throughout my professional life, I have been involved with housing and community development policies, and with broadening access to safe, sustainable mortgage credit. I have come to understand the importance of safe and secure neighborhoods and stable
communities to social and economic advancement.
While at the MacArthur Foundation, we invested millions of dollars to help revitalize and improve the quality of life at a large

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00012

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

7
number of low-income neighborhoods right here in Chicago, communities that are now hard hit by foreclosures and the intended
loss of wealth through the collapse of housing crisis. While among
the hardest-hit communities, Chicagos circumstances are repeated
to varying degrees in communities across the country, which is why
it is so important to do all that we can to help financially distressed families keep their homes, and work to reduce the damage
that foreclosures do to families, neighborhoods, and local housing
markets.
And so, I thank you for holding this hearing to discuss the
FHFA, Fannie Mae, Real Estate Owned Initiative. While my written testimony places this pilot within broader Administration efforts to help heal the housing market, I will focus my remarks just
on the pilot and REO-to-Rental.
We believe that scale initiatives like this have the potential and
the underscore potential to achieve five beneficial outcomes.
First, they can attract private investment back to some of the
hardest-hit neighborhoods where there is weak homeownership demand.
Second, by removing a significant number of REO homes from
the for-sale market, successful REO-to-Rental efforts help stabilize
local housing prices, thereby benefiting existing homeowners and
performing loans.
Third, by creating new rental opportunities for former homeowners and others not interested or able to buy a home. These programs have the potential to reduce inflationary pressures in the
rental market caused by the surge in rental demand.
Fourth, carefully executed REO bulk sales can complement
neighborhood stabilization activities through private investment
and acquisition rehab and responsible maintenance of hard-to-market properties for which there is little ownership demand.
And, finally, this disposition strategy may provide financial institutions, including the Government Sponsored Enterprises in the
case of the FHFA pilot, a potentially cost-effective alternative channel to sell foreclosed properties in scale and in ways that compete
favorably, but theyre all in costs associated with runoff retail sales.
However, as the chairman and others on the subcommittee
noted, perfecting a business model that would convert these potential benefits into on-the-ground results will need to come easily or
quickly. Investors and their partners must be properly equipped to
deal with the challenges associated with developing the necessary
infrastructure that will enable them to cost-effectively rehabilitate,
maintain, and successfully market and manage dispersed singlefamily properties in places that have had, in some cases, bad experiences with nonresident investors and absentee owners. It may
well be that the ability of these emerging businesses will effectively
address community relations and become good neighborhood citizens, will help ultimately determine that financial success and the
quality of outcomes for families and housing markets. With respect
to the FHFA pilot, to achieve good outcomes Fannie Mae must get
more than just a good price for its eight sub portfolios. This is why
were very pleased with the high standards that Fannie and FHFA
set for investors interested in becoming qualified bidders in the

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00013

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

8
auction. Investors must be responsible and responsive property
owners committing to investing for the long term.
Ill highlight just three important requirements of the qualification and bidding process. First, investors who lack experience and
expertise to successfully manage large-met numbers of scatteredsite properties, who dont have experience in the communities in
which the portfolios are located, or who have a history of behavior
that could lead to bad results, as Ms. Burns said, will not be eligible to participate. Qualified bidders must agree to provide tenants,
out of its own funds, housing counseling and credit repair services,
and to provide credit bureaus necessary documentation of tenants
rent, timely rent payments, to help boost their credit scores.
Second, effective operating guidelines and compliance and reporting requirements will be part of the contractual agreement between
the Enterprise and the investors. We are mindful that this pilot is
a transaction between a private seller and private investors, and
not a government program. But nevertheless, it is in the interest
of the Enterprises, and FHFA, and the taxpayers that properties
be well-maintained and the commitments made by winning bidders
will be kept.
Finally, requiring a minimum of 3 years of rental occupancy before the majority of homes can be sold is critical to achieving market stabilization goals and attracting capital sources, management
expertise, and investors with longer-term investment horizons that
FHFA is seeking from its successful bidders.
Ultimately, we hope that if this pilot is successful it can serve
as a model for private market participants. Investors from across
the country may readand hereare actively pooling capital as a
sign of increased interest in this kind of business model. And lenders are beginning to develop products to provide investors with the
necessary financing to invest in this space. We have heard
anecdotally that the private sector is looking to Fannie Maes initial pilot as a model, in the same way that mortgage servicers relied on HAMP when developing their proprietary loan modifications. We hope that many of the same investor standards and
usage restrictions in the pilot will be replicated so that communities are properly protected, tenants are effectively served, and investors can be appropriately rewarded for doing the right thing.
In closing, I want to note that were also encouraged that a number of financial institutions are beginning to develop alternatives to
foreclosures, such as deed-for-lease, deeds-in-lieu, and short sales
programs, as well as selling nonperforming loans to help families
who can no longer support ownership. These initiatives are beneficial to the affected families, help keep REO assets from growing
and properties from deteriorating. And they complement an REOto-rental strategy. Treasurys Home Affordable Foreclosure Alternative Programs set a new standard for short sale and deed-in-lieu
execution by promoting pre-approved short sale transactions, requiring that borrowers with a genuine hardship will be released
from liability for the remaining mortgage debt upon sale, and established a reasonable industry standard for payments to extinguish junior liens. The FHFA is also providing important leadership in this area by directing the GSEs to develop enhanced and
aligned strategies for facilitating foreclosure alternatives.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00014

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

9
Thank you again for inviting me to testify and I look forward to
any questions you may have.
[The prepared statement of Mr. Stegman can be found on page
103 of the appendix.]
Chairman GARRETT. Mr. Stegman, thank you; and Ms. Burns, as
well. I now yield myself 5 minutes for questioning.
Mr. SCHWEIKERT. You can have all the time you want.
Chairman GARRETT. No, I dont do it like that. Ms. Burns, Mr.
Stegman was just talking during his time with regard to nonprofits
and the like. Can you spend a little bit of time and delve into that?
What are your plans on looking at this? Is this an avenue that you
intend to go down?
Ms. BURNS. Sure, absolutely. When we entered into this whole
effort, working with several other agencies, we were very concerned
about partnering up the investors who may be interested in the
bulk sales with local organizations who are already engaged in efforts, maybe in part because of the Neighborhood Stabilization Program funds that were put forward, maybe because there were already efforts in local communities. We brought in a number of
large, sophisticated national nonprofits to talk to us, to advise us
on how to facilitate the kinds of partnerships that were looking for.
And interestingly enough, one of the things that they said very
adamantly was that they did not think that FHFA should impose
a mandate that the investors partner with nonprofits, that if it
were mandatory, the investors would potentially partner up with
less sophisticated nonprofits which would come to the partnership,
maybe at a lower cost, those with less capacity, who would maybe
not add the value that some of the larger, more sophisticated nonprofits could add.
They were concerned, also, that perhaps sham nonprofit arrangements would spring up. And we were very sensitive to what they
were saying, and so what we decided based on all of their good advice was that in the application we would mandate that the investors partner with local organizations which brought the kind of expertise that was necessary to this project. The operational expertise
and the value added would come from sort of natural organic partnerships as opposed to mandatory government-imposed requirements.
Chairman GARRETT. Okay, I appreciate that. So, dovetail that
into my next question, which concerns the pros and the cons of
doing what youre going to do, or hopefully going to do, which is
bulk sale as opposed to individual sale. Talk about the pros and
cons briefly.
Ms. BURNS. Okay.
Chairman GARRETT. And then, is there an element to the nonprofit at that point, as well?
Ms. BURNS. Yes, absolutely. Today, there are sales to investors
that take place, generally one by one. There are some small bulk
sales of lower valued properties that take place. One of the concerns we have is that with the retail sales, the investors often are
coming in with cash, which is requiring properties to be discounted
below where we would like to see them discounted. And as Mr.
Schweikert had said previously, its not really getting at the more
local problem when there are large numbers of REOs in certain

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00015

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

10
markets. This effort, the bulk sales effort, really is intended to
bring in a different investor class, to bring in the large investors,
institutional investors, REITs, who really focus on real estate investment, and to figure out how they can bring new private capital
into markets and tie it up with operational expertise at the local
level. We had heard that if we could arrange for bulk sales, the investors then could begin putting money into the infrastructure. As
Mr. Stegman said previously, thats one of the biggest issues, thats
one of the biggest challenges with this project, trying to help create
infrastructure at the local level to make this kind of project work.
And so, the bulk sales approach provides the opportunity for the
money to come in, investing in infrastructure.
Chairman GARRETT. My final question: you laid out all that stuff,
can you give us briefly, assuming this all works great, then what?
Ms. BURNS. If this works great, then we will certainly be engaged
in many more transactions. I think this first transaction, really
what we need to see is, where will these assets price? How will the
types of assets, size of the pools, the markets affect the pricing?
How will the restrictions that we put in place affect the pricing?
How will the mandate that the institutional investors work with,
local organizations, affect the pricing? And so, well have to see how
that all plays out together and learn some lessons from these
transactions and determine whether or not we need to change the
nature of the pools going forward and make a decision about what
the transactions will look like in the future.
Chairman GARRETT. Great, thanks. I now recognize Mr. Schilling
for 5 minutes for questions.
Mr. SCHILLING. Thank you, Mr. Chairman. I should have mentioned earlier, actually, I ran from the Quad Cities, home of the
John Deere tractor, representing the 17th District of Illinois. So,
first I just want to say thank you for coming out. One of the things
that I want to talk a little bit about is the bulk sales, and how
those are determined. Because one of my fears, especially when
were doing one of these trials, is that what will happen is these
investors will come in and they will pick up the cream of the crop
of the housing thats available, making this look better than it is.
So, can you kind of tell me how thats going tois it going to be
a mix of cream of the crops with some of the housing that needs
more work, or
Ms. BURNS. The initial pools right now, the investor must buy all
of the properties in the pool. So they cant pick and choose, they
cant cream from those specific pools. There are eight subpools, so
they can buy one pool, or all pools, or several pools, but they must
buy everything in the pool. The properties that are in these pools
are mainly already rented properties, and we did that intentionally
because we were concerned that in this first transaction, we
wouldnt know how long it was going to take to sort of execute from
start to finish, and we didnt want vacant properties sitting on the
market for an extended period of time. So, these propertiesor, so
these pools are composed of, I would say, sort of moderately priced
homestheyre not in very poor condition, and theyre not premier
properties. Theyre sort of middle-of-the-road properties.
Mr. SCHILLING. Very good, so you can put some sweat equity into
them and make things happen. Either one of you can answer this

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00016

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

11
one. Your testimony basically states that the Enterprise currently
had about 180,000 REOs. Do you know how many REO properties
the FHA currently has?
Mr. STEGMAN. I dont. Ms. Burns may know.
Ms. BURNS. No, I dont know. I think its in the 50,000 range, but
we can certainly find out for you.
Mr. SCHILLING. Okay. Also, the testimony states that the Enterprises currently own or guarantee approximately 1.3 million nonperforming loans, the majority of which are more than a year delinquent. Do you have an estimate of how many of these loans you
expect to eventually become REO properties?
Ms. BURNS. We dont have an estimate of how many will become
REO properties, in large part because we are hoping to engage in
other loss mitigation strategies to prevent that from happening, to
tell you the truth. We really would like to either get the borrowers
into modification, or if they cant stay in their home, liquidate
through some sort of a short-sale-type arrangement, or sell the
nonperforming loan to another party who can work to resolve the
situation.
Mr. SCHILLING. Do you have an average cost, roughly, from something that we have done already, like for the repairs of some of the
REO properties?
Ms. BURNS. I could bring that back to you. We do have all those
numbers. I could bring them back; I dont have that off the top of
my head.
Mr. SCHILLING. Thats fine.
Ms. BURNS. And some properties dont get repaired at all, some
of them are in fairly decent condition when you come into Fannie
Mae and Freddie Macs, that dont perform any repairs. But, we can
find the average cost.
Mr. SCHILLING. Yes. And I appreciate what you folks are trying
to do. Because what we are trying to do is, of course, put a floor
onto the real estate market to where we can stop it frombut, of
course, a lot of times what we see happen is unintended consequences when it comes to some things that we try to have good
intentions with.
But with that, I yield back.
Chairman GARRETT. Thank you. The gentleman yields back. I
recognize Mr. Huizenga for 5 minutes.
Mr. HUIZENGA. I appreciate that, Mr. Chairman. And thank you
for your testimony. I just want to make sure I understand. You
were talking about the eight pools that these properties are
brought into. And, again, I just want to make sure Im clear on
this. So, geographically, were talking Atlanta, Chicago, Florida,
Las Vegas, Los Angeles, and Phoenix. Which is six, but then Florida is broken up into three areas, so it would beso, each of those
pools would be a Los Angeles or a Phoenix or a Las Vegas, or some
particular area in Florida; is that correct?
Ms. BURNS. That is correct.
Mr. HUIZENGA. Okay. Now, obviously, if were targeting REITs as
potential purchasers of thesethese are not unsophisticated investors, or organizations, it would seem to me that as Mr. Stegman
was talking about, if the goal was to stabilize neighborhoods, homeownership is probably one of the leading indicators of a stable

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00017

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

12
neighborhood. Which, frankly, that goal may have helped it get
helped us get out over our skis. And having homeowners who
maybe werent quite ready for that ownership. And Im trying to
make sure, though, that I understand if we have a large pool somewhere, 50,000 or 60,000 potential properties; right, is that what
were hearing?
Ms. BURNS. For this kind of arrangement, I doubt you would ever
have a pool of that size. This first transaction is 2,500 properties
spread across those 8 subpools. And, really, Fannie Mae and
Freddie Mac both have retail strategies that sell first to owner/occupants, as you were saying. And those have been very successful.
So, we would considerthe retail sales execution will continue to
be the primary way that they sell their REO properties. Theres not
a sufficient concentration of the units to sell them in bulk at those
very large volumes, and we agree that its best to first try to get
an owner occupant into the property.
Mr. HUIZENGA. So, were talking about a fairly smallI dont
want toyou keep using the word pool, because we have too
many pool discussions happening here, on the eight various pools.
Its a narrow slice of
Ms. BURNS. Thats correct.
Mr. HUIZENGA. eligible properties.
Ms. BURNS. Thats correct.
Mr. HUIZENGA. I think maybe going to my colleagues concerns
here, if we still have a significant number of properties, it seems
like were kind of throwing around two sides of this. These investment pools are large, therefore, we need to have organizations such
as REITs coming in and doing this professionally. Yet, if were talking 2,500 divided across 8 separate pools, and Im a social science
major, not a hard science major, but my math wouldits somewhere near 300 homes per pool?
Ms. BURNS. Actually, we were testing varying sizes, so the smallest pool is approximately 100 properties, and the largest pool is approximately 500 properties.
Mr. HUIZENGA. Okay. And then do you expect these REITs to be
coming in and purchasing the entire pool, a slice of the pool, how
many players are going to come in and deal in that, the waters of
that 100-home pool versus the 500-hundred-home pool?
Ms. BURNS. Right. Thats one of the things that were testing.
The opportunity is to buy all of the subpools at once, to buy
Mr. HUIZENGA. All eight?
Ms. BURNS. All eight. To buy one pool at a time.
Mr. HUIZENGA. Does that cause you concern, Mr. Stegman, if
youre talking about how you need to have a local understanding
of whats happening? If Im a California REIT, or a Michigan REIT,
and maybe Im a Michigan REIT and I have no connection in any
of those eight areas, personally, I would not be concerned with
that, because, again, I think these are sophisticated investors that
arent just investing, they are protecting their assets, and they
know what theyre going to be doing. But, does that cause you any
concern?
Mr. STEGMAN. Thank you for that question, it gives me a chance
to clarify. Were talking about the requirements that bidders,
whether they bid on all eight or just one, have experience or part-

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00018

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

13
ners who are familiar with and have worked in the geographies in
which these portfolios are located. And so, the source of the dollars,
if they come from a REIT that has sufficient investment capital to
bid and win on all of those, the evaluation process, my understanding is, and Ms. Burns can correct me if Im wrong, but they
would be evaluated geography by geography, sub-portfolio by subportfolio, and if they fail in one or two, that would really not bring
them to a winning bid. I think the other point I would make is that
the composition of these portfolios, you may be in a suburban subdivision in one case, and an urban neighborhood in another, and
the relationships that were talking about really have to be tailored
to the locality, and you would expect a sophisticated investor to recognize that.
Mr. HUIZENGA. I believe my time has expired, but I would like
to, maybe in another round here, explore exactly whether these
properties have been identified. Do we know whether they are
urban or suburban or rural, or where exactly those properties lie
within these widely disbursed
Chairman GARRETT. Do you want to just give a quick answer to
that?
Ms. BURNS. Sure. So, the effort was to find properties that were
concentrated relatively closely within the markets. But it is true
that some will be in suburbs and some will be in urban areas. I
dont think there are any that are in truly rural areas, within any
of these markets. But there will be sort of wide geographies within
each subpool.
Chairman GARRETT. Thank you, Ms. Burns.
The gentleman from Arizona?
Mr. SCHWEIKERT. Thank you, Mr. Chairman. And if I come
across a bit cranky on this, its a hazard of the fact that this is one
of my areas of true expertise. Before getting elected, I was the largest buyer of single-family homes in the southwest.
My investment partnershipsmy undergraduate is in real estate
and real estate economics. I chaired the board of equalization; I
was the county treasurer. This is my life.
Mr. Stegman, I am very uncomfortable with much of your opening statement, on how bureaucratic it sounds. And look, first let me
paint a scenario from my expertise with Maricopa, Arizona, one of
the hardest-hit areas, but also one of the largest. Its the third or
fourth biggest county in the United States by population. I can
take you through neighborhoods that have been devastated by foreclosures and look better today than they have in 30 years. Because
one, two, three, four, foreclosure, investor bought it, new roof; one,
two, three, four, foreclosure, new family, new landscaping. It has
become almost an urban renewal because individuals have brought
in their own capital and fixed up those neighborhoods. And there
finally is that role of value and fixing up and new lives being
formed. And this arrogance that somehow were going to do a command control, it disturbs me. Because at some point youre making
an assumption that an investor, whether theyre bidding on 25
houseswhich we need to talk about, whether you should offer a
pool size of thator 1,000 houses, as we bought. We dont know
how to manage the money, were not interested in maximizing our
rate of return, having good tenant relationships, all the things you

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00019

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

14
would do in managing the money organically, without a command
and control system.
So, with that bit of tirade, lets first startand I didnt even
reset my own time. Ms. Burns, on your pool differentials and size,
I noticed you did not go down to some of the previous discussions
we had with your agency.
Or, going down, even offering sort of micro pools, 25 properties
all the way up to 500,000. Is that just because you are offered so
few properties in this pilot program?
Ms. BURNS. No, there are still small bulk sales that are done
today. But, we felt that this particular effort was intended to try
to bring in those larger investors, so we needed to have larger
pools. We will still consider small bulk sales, but the concern was
that there was already a program in place that was offering that
kind of an arrangement. We also had heard, actually, from the
small investors that they were more interested in financing than
in the actual bulk option to buy; they were looking for financing so
that they could buy properties one at a time and ultimately create
their own pool.
Mr. SCHWEIKERT. Okay. But in this experiment, if you were
doing true price discovery, you would have done anything from 25
to 1,000 houses.
Mr. STEGMAN. Do you actually have someone who does this type
of investor economics at the agency?
Mr. STEGMAN. Excuse me?
Mr. SCHWEIKERT. Do you have someone who has an expertise in
this side of the housing economics, which is the investor or the sale
take-down side?
Mr. STEGMAN. There is expertise at Treasury in these areas.
Mr. SCHWEIKERT. Okay. Our models used to always say that we
would not even break even until we hit 200 houses in a pool. Just
because of theand that also mattered on our geographic distributionjust because of our property management mechanics. But, ultimately, you may have a group of dentists that all get together
and they want to buy 25 houses. God bless them. You may have
a REIT that says, were not playing unless you can give us 1,000
properties and in a geographic, major urban area, because thats
the type of money we have to park for our fees and management.
And maybe this is best for Ms. Burns. Why shouldnt I be disturbed
that there are so few properties in this program?
Ms. BURNS. Interestingly enough, while it sounds like Fannie
Mae and Freddie Mac have a lot of properties that are just sitting
on the market for sale right now, it doesnt really work that way.
So, there are 170,000 between the two companies, and only about
half of those are actually on the market for sale. And in concentrated and specific markets, there are only a handful of markets
that have at least 1,000 properties.
Mr. SCHWEIKERT. But isnt that almost actually the point, you
have a pipeline. Okay.
Ms. BURNS. Right.
Mr. SCHWEIKERT. Particularly in intertrust States, I understand
you have some States where because of thethe mortgage and the
mechanics, that you may have redemption periods
Ms. BURNS. Thats right.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00020

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

15
Mr. SCHWEIKERT. over here. But if you have literally half your
inventory, and in my understanding, its dramatically more than
half your REO inventory that isnt even being marketed, isnt that
literally the inventory you should be grabbing and moving into
these?
Ms. BURNS. The inventory thats not being marketed is not available for sale because of the redemption periods, because of being
repaired, because there are tenants in them, or families who are
being evicted because the property has been foreclosed upon.
Theyre in a state of preparation for sale. And thats sort of the way
it always works, that theres some time period when the property
is being prepared to sell.
Mr. SCHWEIKERT. But the fact of the matter is you can still put
a property up for sale, at least in the deed class to trust state, the
day after you do the takedown of the deed of trust. And so, youre
telling me, Maricopa County, the third, fourth biggest county in the
country, has 400 houses? Thats all you could put together in a
pool?
Ms. BURNS. I will say, we were very sensitive to two sides of this
issue. One is the real estate agent who is selling properties one by
one to investors today, who felt that this bulk sales approach was
interfering with a process that worked well today. So, we were very
sensitive that there were plenty of people who were complaining
that the bulk sales approach was actually problematic in bringing
market recovery that we wanted.
Mr. SCHWEIKERT. Okay.
Ms. BURNS. Then we had another side
Mr. SCHWEIKERT. Actually, thats economically backwards. The
fact of the matter is, if youre in a marketplace that has 4 or 5
weeks of property for sale, and were actually hearing that the average contract, in at least myand I know Im being Maricopa
County-specific, is getting 8 to 12 contracts now.
Ms. BURNS. Right.
Mr. SCHWEIKERT. Were in a fascinating cycle. And every time a
house sellswhat is your model for winter property sales, of how
many dollars go back into the rehab, or the carpet, the drapes, the
landscaping? Do you have a base model of dollars?
Ms. BURNS. Do you mean in the existing retail sales strategy or
in bulk sales?
Mr. SCHWEIKERT. Yes, even in your retail strategy, because the
amounts going to be the same, or your investor sales?
Ms. BURNS. Okay. That was the same question that
Mr. SCHWEIKERT. Okay.
Ms. BURNS. Chairman Garrett asked, and I dont know the answer.
Mr. SCHWEIKERT. We have a built model, that $6,000 was our average, so for whatever value that is. Think about the sales youre
starving from Home Depot, from the local landscaper, from everyone else, by the trickle out here. If you want to stimulate effect in
many of these marketplaces, sell the properties.
Ms. BURNS. Its ironic that you say that, because we actually
have gotten articles from a number of people who think we should
not engage in this bulk sales approach, pointing to just what youre

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00021

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

16
talking about, saying, Look at how strong the Arizona market is;
you shouldnt be doing bulk sales in these markets.
Mr. SCHWEIKERT. Yes.
Ms. BURNS. Just so you know.
Mr. SCHWEIKERT [presiding]. No, I understand. But if you sit
them down and explain to them that theyre complaining that investors keep buying the properties, whats happened is you have
just now forced the investors to go beat them to it at the auction
steps, instead of the retail sale that youre doing. So, theyre someone that doesnt understand basic housing economics.
And Im way over my time. Mr. Schilling, I now yield to you 5
minutes.
Mr. SCHILLING. Very good. I thank you for that. A couple of
things. Boy, youre pretty good. Hey, will you let me know when
Im getting close on that timer.
Mr. SCHWEIKERT. Well just start tossing stuff at you.
Mr. SCHILLING. Okay. That sounds good. What I wanted to do is
go back to Mr. Stegman. Do you expect the Attorney Generals
mortgage servicing settlement to impact, or how do you expect it
to impact the future of the REO companies, I guess? Im sure its
probably seen as a positive impact, I would hope.
Mr. STEGMAN. Congressman, Im not sure about the REO and the
current REO inventory, per se, but where the settlement comes
into play is in the nonperforming loan areas, and whether or not
a servicer who might sell a portfolio of nonperforming loans, that
a portion of which then get modified would, nor to the credit of the
seller of those, the servicer who has an obligation under the settlement, those issues are still being really clarified. But with respect
to the already existing REO emporium, Im not sure that there is
a direct constraint, if you will, on this pilot.
Mr. SCHILLING. Okay. And then do you know how many of the
REO properties currently exist in the private markets?
Mr. STEGMAN. Ms. Burns might be able to clarify. But my understanding was there were about twice the number of REO properties
in the non-GSE portfolios, so were talking about perhaps 400,000,
and around 200,000 in GSEs.
Mr. SCHILLING. Okay. And then given that neighborhood stabilization is the goal of the program, how long will it take to be
able to determine if the program has been successful?
Mr. STEGMAN. I think if you start with the pilot, clearly what
were trying to do is to learn from that pilot, and we dont expect
although, in a micro neighborhood, perhaps, we would be able to
see in a pilot a couple of hundred rental houses improved and stabilizing, and maybe having an effect. But if you kind of look at
what it takes to get to scale, and the real scale of the problem, this
is notit will take a while for this business model to grow and to
reach scale, and to really have an effect on the market. So, this is
something that we want to be able to watch. And one of the reasons why I think the pilot is so important, is that we have an interest in really learning from it in kind of a systematic way. Right
now, its not clear to me how we really determine what is happening across the country in the non-GSE States, and what effects
it might have, because these are proprietary transactions where no-

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00022

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

17
body is collecting kind of the baseline information and so on. But
it will play out over several years.
Mr. SCHILLING. You see, Im a small business owner in the Quad
Cities and I struggle with that, because we ought to have some picture of what the success of this program is. Im with David on this,
in that I dont believe that we shouldwe have to sell, we have to
get rid of these houses, basically. And, I think we saw this coming
for years; we knew it was happening. People who probablynot everybody should own a house. When you come in, and the Federal
Government, every time they engage this process and try to, so to
speak, take it over, thats why were in this mess were in. People
were buying houses who should not have been buying houses. My
wife and I, when we started out, we couldnt afford a house, so we
rented. But what happened over time is that you could just qualify
without qualifying. So I just get frustrated with everything thats
going on.
Mr. STEGMAN. Congressman, theres a difference betweenwe
know what success looks like and how long will it take for success
to materialize and to be evident. And I think, as I said in my testimony, there are places that are seeing surging rents because of the
increases and demand.
And we would expect to see that relative to other places that
dont have these kinds of pilots and programs moderating rents.
We would hope to see stabilization of home prices and improved
performance of mortgage loans there. So, there are a number of
outcomes that I think we wouldnt see, but depending on scale and
where these are and what is happening in the general economy will
determine how long it takes to see this.
Mr. SCHILLING. One of the things I find, and this is my first time
ever serving in Congress, I actually had no intentions of ever running for a public office until I was watching what was happening
to my country, to be quite forward. But, do we haveyou have a
little bit of a background on David and his background. Do we have
people in your service, who work with you, who have the expertise
similar to what this personbecause the thing I find with the Federal Government, its a bureaucratic system to where they appoint
their friends and buddies. And its quite frustrating, to be forward.
But, do we have the experts? We have people who are putting the
healthcare systems together who have no expertise in healthcare.
But, do we have some top-notch people? We have some great Americans, Im sure theyre out there, but do you feel that you guys have
some good solid people who are in there trying to put this pilot together and make some good decisions for the United States of
America?
Mr. STEGMAN. If you want to talk about putting the pilot together, speaking from the Treasury perspective, we have an enormous amount of talent. But you also have to appreciate that we are
talking with stakeholders, investors, folks with the kind of experience that youre talking about, institutional investors, small investors, all the time about the kinds of issues that were talking about.
So, were not sitting in a bubble or a vacuum trying to think grand
thoughts. We are really connected to the markets and the communities.
Mr. SCHILLING. Very good. Thank you all. My time has expired.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00023

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

18
Mr. SCHWEIKERT. Thank you, Mr. Schilling.
Mr. Huizenga?
Mr. HUIZENGA. Thank you. And I just want tothats the good
thing about having a smaller field hearing like this, we get lots of
bites of the apple, otherwise were
Mr. SCHWEIKERT. More chances to ramble.
Mr. HUIZENGA. Yes, as freshmen, were so far down on the dais
we have to be there an hour-and-a-half before we can actually
question you. So, this is great. I want to kind of return to my understanding of these eight pools. Youre saying theyre pools divided
up between one to 500 homes. As Mr. Schweikert was saying, they
didnt really look at pools until there were about 200 homes, 200
properties. Im not sure if that was
Mr. SCHWEIKERT. We didnt make a profit until we hit 200, to
cover our management expenses.
Mr. HUIZENGA. And there are different models for different sizes,
and I certainly know some people who at least view themselves as
professional investors who may do smaller and those kinds of
things. But it seems to me were trying, if were going out and basically saying, Hey, who wants 2,500 homes? What kind of REIT
might be out there looking at that? Thats what I at least heard
you were indicating, that theres an opportunity to buy the 2,500
down to 25. Those are very different, very different business models, and investment models.
So, I guess two things. One, I would like you toand I assume,
Ms. Burns, its probably your area heredescribe how this bulk
sales schemeand I use that in the British sensescheme, plan,
project is different than the current bulk sales that you have talked
about. So, explore that a little bit, and then I want to touch on
maybe more philosophically, both from Mr. Stegman and yourself,
the speed of which is most beneficial to have these properties
through the process, that it seems to me pretty clear we need to
go through. And what are the benefits and the liabilities of slowing
the process down and only making this 2,500 versus speeding it up
and some of those, maybe, dueling views as you indicated. So, if
you could touch on those two things for me.
Ms. BURNS. Sure. Lets start with slowing down, speeding up.
There were 2,500 properties total across the whole country.
Mr. HUIZENGA. Actually, it would be more helpful for me
Ms. BURNS. Yes.
Mr. HUIZENGA. if I knew the differences between what youre
talking about with this program versus what is currently happening.
Ms. BURNS. Okay, sure. The existing small bulk sale program
takes properties that have been marketed for some period of time,
generally, 6 months. They were put out for sale to a nonprofit or
an owner/occupant first, for 15 days, if they didnt sell, then investors had an opportunity to purchase the property that didnt sell.
Mr. HUIZENGA. Basically, everybody has passed.
Ms. BURNS. Everyone has passed it overgenerally, low-value
properties that, for whatever reason, have not sold, maybe the condition, maybe just the market and the location itself. Those properties are pooled up and sold often to local governments, nonprofits,

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00024

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

19
smaller investors who are looking to repair and put them into rental arrangements, generally.
Mr. HUIZENGA. How big are those lots, typically? Are we talking
5 homes or 50 homes, or
Ms. BURNS. I actually dont know.
Mr. HUIZENGA. Yes, I didnt mean lots, were using way too many
lots and pools.
Ms. BURNS. Yes, I know. I dont know the average size of those
pools. I know that theyre smaller than the ones in this bulk sale
approach, which has 100, so, 30 to 50.
Mr. HUIZENGA. Could you get that information to me?
Ms. BURNS. Sure, absolutely.
Mr. HUIZENGA. That, to me, is of interest.
Ms. BURNS. Sure.
Mr. HUIZENGA. If you have stale property that has been out
there, and my guess is if its on there for 6 months, its probably
on there for 18 months. Thats what Im hearing from my former
colleagues is, you have new property hitting the market, its either
gone or its going to just become a dinosaur and its going to stay,
for whatever purpose. So, if you could maybeafterwards well do
some follow-up, that would be helpful on understanding this current schedule.
Ms. BURNS. Sure, absolutely. So, this new bulk sales program is
really intended to create larger pools and
Mr. HUIZENGA. Presumably with slightly better properties.
Ms. BURNS. Better properties, exactly. Take them off the market
earlier in the process. Not post-retail sales strategy, but as soon as
they come to Fannie Mae and Freddie Mac and are prepared for
sale and are eligible for sale. As well as, of course, we put in the
rented units. Fannie Mae in particular has a very large number of
units that are already rented, they already were owned by investors whose properties were foreclosed upon.
So, were trying to put those two groups together in these pools.
The speed with which we can move these pools, this first transaction is taking longer, in large part because, as Chairman Garrett
said, we want to get it right. We have had lots of negotiations and
discussions about how to balance out competing interests. There
are people who think that we shouldnt do bulk sales at all, because theres sufficient demand in most of these markets from
other owner/occupants or investors. And there are parties who
think that we need to be very careful about engaging the local organizations which have been involved in NSP activities and such,
and use these properties as part of efforts already under way.
Were to find the middle ground between those two, and so were
trying to be very careful in how we design this first transaction.
Mr. HUIZENGA. And I see my time has expired, so we might have
to explore more of the aspect of the process, butand I know we
havethe march of time is on us all as we are going to have to
get on planes to Washington, D.C., and those kinds of things. But
I appreciate this, and I would love to continue that conversation.
Thank you.
Ms. BURNS. Sure.
Mr. SCHWEIKERT. This is fun, when youre timing, of course I can
justshare with me whenright now in the 2,500 that are being

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00025

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

20
broke down here. Was I to understand a large number of these already have underlying rental contracts?
Ms. BURNS. Thats correct.
Mr. SCHWEIKERT. In your attempt to do price discovery, have you
broken them apart, saying, here are ones that already have underlying rental agreements, and so rental property rights and those
that dont?
Ms. BURNS. Yes. So, ultimately, when the bids come in after this
qualification process and we get to the eligible bidders, when the
bids come in the bidders will tell us how they value each property.
And so, well have a sense of their perspective relative to our perspective, and well have the opportunity to see, do they pay more
if theres a renter in the home, do they pay less if theres a renter
in the home.
Mr. SCHWEIKERT. Okay. And are you providing the data of the
rental stream, both the rent and quality of the tenant in regards
to the payment history?
Ms. BURNS. Yes.
Mr. SCHWEIKERT. How soon the rents come in.
Ms. BURNS. Yes. Theres a data room where all of the investors
can see for every single property, photos, rent information, title information, everything that they would need.
Mr. SCHWEIKERT. And disposition of the assets. So, lets say my
new best friend here, he and I have our pool, were one of your
qualified bidders, and we buy 400 properties. Were blessed to get
this. Are we deed-restricted, and if so, for how long, before were
allowed to sell?
Ms. BURNS. Youre restricted for 3 years, but there is the ability
to sell up to 10 percent of your subpool.
Mr. SCHWEIKERT. Okay. So we are going to do a 10-percent rule.
Ms. BURNS. Right. And if any particular property presents a
challenge in terms of cash flow, rental income cash flow, its just
not economic to hold it, that may be considered for sale, as well.
Mr. SCHWEIKERT. Okay. But, is this going to be done through a
deed restriction?
Ms. BURNS. Yes.
Mr. SCHWEIKERT. Okay. So, each title in the property will have
a deed restriction, saying it cannot come up for sale within this period of time. And so, theyre going to have to come back to you for
release clause releases on the 10 percent Im allowed to sell each
year, plus an application of another release on that deed restriction
if I have a property where either I have a family who are my tenants who are ready to buy, and thats specific to them, so thats a
unique circumstance, and we want these folks to be homeowners,
they have been good tenants, or a property that I cant for some
reason lease, or has some other inherent structural problem to
lease it. But I would still have to come back to you to get that deed
restriction released.
Ms. BURNS. Right. Sometimes, there are actually two options
available to the bidders. There are joint venture arrangements
where Fannie Mae will actually continue to be a partner, in which
case Fannie Mae will definitely be saying yea or nay to the sales.
Theres also the option to buy the properties outright, just an out-

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00026

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

21
right sale. There are restrictions that are imposed either way, but
when
Mr. SCHWEIKERT. Lets just work on our scenario. Were a cash
buyer, we buy the properties. Your ability to hold the court
Ms. BURNS. Right, that has been
Mr. SCHWEIKERT. that is through a deed restriction.
Ms. BURNS. Yes.
Mr. SCHWEIKERT. So, youre going to have to have a whole mechanism process where Im coming to you, just as if any of you have
ever been in bulk sales or multi-lot sales, those things, where you
do like a lien release, in this case its a deed restriction release.
And have you thought through those mechanics?
Ms. BURNS. We have certainly talked about it at length, this is
one of the issues that we have talked about balancing. There are
concerns on the mission-related side that these properties be held
for some period of time for rental. It likely will affect pricing. It will
affect pricing for all the reasons youre saying. The flexibility and
the optionality to the buyer is gone. So, this, again, is a test and
well see how it plays out.
Mr. SCHWEIKERT. Mr. Stegman, have you seen much of a regional difference in interest on the 2,500 properties so far?
Mr. STEGMAN. We are not privy to potential bidders or what is
going on in the data room or anything like that.
Mr. SCHWEIKERT. All right. Ms. Burns?
Ms. BURNS. I have actually seen some information, but I dont
think from what I have seen, I have seen any obvious trends
Mr. SCHWEIKERT. So, you have seen
Ms. BURNS. or obvious patterns.
Mr. SCHWEIKERT. But your initial impression, I accept this is anecdotal, is sort of across-the-board, is that the interest is wide. I do
want to do one, and this is me being cranky, but hopefully in a loving way. You made the comment about how we dont have lots of
data from the Nation and different marketplaces, and correct me
if Im misphrasing you, on other bulk sales that have been done
through private servicers or other things out there. And I will very,
very aggressively disagree with you, real estate is a very public
market. Thats why we record it and we get lots of data. And there
are actually whole newsletters and magazines every day coming to
me from them, I have to find some way to unsubscribe to them,
that tell me, Hey, you know, this little package was sold and sat
in California through servicer X, Y, and Z of these 10 houses.
Half of them are rented, heres their cap rate, etc. Were flooded
with data on this type of situation.
Mr. STEGMAN. We have access to newsletters youre talking
about, we see reports on varying cap rates. What we dont know
is the effects that these sales are having on the larger market.
Mr. SCHWEIKERT. But thats easy to
Mr. STEGMAN. And
Mr. SCHWEIKERT. But thats absurd. You can actually then look
at the market area and you see whats selling per price, per square
foot, in the different subcategories. I had this out of my home office
on my servers. It just
Mr. STEGMAN. Right.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00027

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

22
Mr. SCHWEIKERT. Im concerned because this is a very sophisticated, very mature
Mr. STEGMAN. Yes.
Mr. SCHWEIKERT. very disciplined market. And my great fear
aslook, this isnt your world of expertise, and it shouldnt be. But
youre coming in and trying to rebuild the world thats out there,
where there are thousands, tens of thousands of people who do this
every day.
So, lets see, I had one or two other just sort ofhow soon, lets
say this is magic and everyone loves you and it just clicks off, and
youre elated, how soon before you do the next sale, and how far
are you willing to scale up?
Ms. BURNS. Obviously, were going to learn a lesson from this
first sale. We would like to do the next sale quickly, we have already started identifying markets and assets in the hopes that we
can put forward another sale within just months of closing on this
first transaction. However, we do need to see, what is the appetite
for different size pools, which of these assets seem to be valued better than others? So, we have to take the opportunity to learn what
we can from this first transaction.
Mr. SCHWEIKERT. How many applications do you have so far?
Ms. BURNS. For, to become
Mr. SCHWEIKERT. To be a bidder.
Ms. BURNS. qualified to be bidders. I dont think Im allowed
to tell you that. Im following the SEC private placement rules for
this process. But based on what you said earlier, its fewer than
you think.
Mr. SCHWEIKERT. Okay.
Ms. BURNS. You said hundreds and hundreds before; its not hundreds and hundreds.
Mr. SCHWEIKERT. All right. And the next thing is, so, Im hearing
that you havent really picked up a regional distribution in it, but
you have qualified bidders, do you believe some of the mechanical
restraints you have added, are there any things you believe that
have been put in your bid requirements, that you believe are acting
as pushbacks for investors to say, Well, the heck with this, Ill just
go buy on the auction steps instead?
Ms. BURNS. I dont know yet. Were very curious to see that. I
think were very concerned that any restrictions at all could affect
pricing and could affect an appetite. So, I think this is an opportunity to see.
Mr. SCHWEIKERT. In the next bidding, in the next pool package,
are you also going to try to restrict it to properties that already
have rental agreements underlying?
Ms. BURNS. Again, well have to see how this first transaction
goes. We had originally planned to have only vacant in the next
transaction, but given the timing of this first transaction and how
long it took us to get this transaction from opening announcement
through to fruition, I would be concerned, again, about having vacant properties held off market for an extended period of time.
So, we might try the next transaction with rented properties
again.
Mr. SCHWEIKERT. Okay. My great fear is youre creating a sort
of restraint and barrier, and the inefficiency of grabbing property

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00028

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

23
that, you know, the deed has been transferred over is yours not the
markets. The efficiency of saying, heres our inventory90 days
from now, were putting it up for auction. Thats an inefficiency on
your side.
And the last thing, then Ill see if my friend, Mr. Schilling, has
any last questions or comments, and we might move on to the next
panel, is part of this passion is, I lived this housing crisis. I was
the county treasurer as the world was coming to an end. So, I
oversaw the real estate tax collections. I have been on all sides of
this. Arizona has gotten dramatically better faster than almost
anyone else, because were cleaning out our inventories. People are
finding jobs again, theyre getting to be able to buy houses again.
Its coming back after. And in many ways the restraint, saying,
well, we dont want to put too many properties on the market,
these restraints actually have taken what should have been a 3- or
4-year housing depression.
And I see whats going on in some of the mortgage States and
some of the States that have had prolonged foreclosure processes,
and, oh, were going to do another moratorium. And those States,
all maybe meaning well here, will be in a housing depression for
a decade because of not understanding basic housing economics.
And my fear is I dont want you to be one of those that, almost like
back in the RTC days, if you look at the real reports that were
done, we took a 3-year commercial real estate collapse and made
it last almost 10 years because we trickled out the assets. And
every time you sell a house, someone gets a job, whether its making the carpet, whether its fixing up the windows, something.
Look, if you will sell these and move them as fast, I will stand
in the parade and Ill defend you from those who dont understand
reality. But my great fear is by not pushing, by becoming bureaucratic and not moving these assets through, youre crushing people.
Youre killing their ability for their housing values to come back up
for those neighborhoods to recycle. This is not our version of urban
renewal, but in a weird way thats whats happening.
So, Mr. Schilling, outside of that diatribe, any other last questions?
Mr. SCHILLING. I dont have any. I would just like toI think
this could be a thing where we come in with good intentions, with
some unintended consequences that make this prolonged and go
further. But I just want to thank you both for coming in. And with
that, I yield back.
Mr. SCHWEIKERT. The Chair notes that some Members may have
additional questions for this panel, which they may wish to submit
in writing. Without objection, the hearing record will remain open
for 30 days for Members to submit written questions to these witnesses and to place their responses in the record.
This panel is now dismissed. Thank you for your time.
[Recess. Panel change.]
Mr. SCHWEIKERT. Lets go ahead and start. This is our second
panel in this field hearing. You, hopefully, all heard some of the
dialogue from the previous panel. What we would love is some
more details of the reality of what you see happening in the marketplaces, how we both satiate genuine demand, but also through
this process help bring back our housing market, and particularly

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00029

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

24
in those submarkets that have been hardest hit. And is the mix of
bulk sale, instead of many of those who have great concern that the
retail pipeline, just because of the mechanics, is not designed to
deal with both this type of product flow and all of a sudden the
spikes of demand actually goes up, goes down, and this particular
cycle starts to come back up. Are we doing whats necessary to
have that stimulative effect in the environment around us, and is
that satiating that demand? Im going to turn to my neighbors here
and see if anyone else has an opening statement. Mr. Schilling?
Mr. SCHILLING. I just want to say its an honor to be here, and
I thank you all for coming.
Mr. SCHWEIKERT. Mr. Huizenga?
Mr. HUIZENGA. I think everybody would rather hear from you
than me, so lets go.
Mr. SCHWEIKERT. Our second panel consists of: Mr. Sean Dobson,
CEO of Amherst Holdings; Mr. Rob Grossinger, vice president of
community revitalization for Enterprise Community Partners, Inc.;
Ms. Mary Kenney, executive director of the Illinois Housing Development Authority; and Mr. Dick Pruess, CEO of the Community
Associations Institute.
Mr. Dobson, we will begin with you. You are recognized for 5
minutes.
STATEMENT OF SEAN DOBSON, CHIEF EXECUTIVE OFFICER,
AMHERST HOLDINGS

Mr. DOBSON. Great. Thank you. Mr. Chairman and members of

the subcommittee, thank you for your invitation to testify today.
My name is Sean Dobson, and I am the CEO of Amherst Holdings.
Amherst Holdings consists of several Enterprises, all of which support institutional investors and various portions of U.S. real estate
demands markets.
My partners and I have been a part of the housing finance infrastructure of the United States for over 25 years. I want to point
out that, although we are a dedicated real estate finance platform,
Amherst demurred on the opportunity to originate and underwrite
subprime Alt-A pay option mortgages and their residential mortgage-backed securities (RMBS) and collateralized debt obligations
(CDO) progeny.
I am here to discuss our views of the U.S. housing markets and
how we view the costs and benefits of properly managed bulk sale
transactions. Last year, over one million homes were lost to foreclosure; these homes were liquidated through a legacy process targeting owner/occupant buyers. Unfortunately, the bursting of the
housing bubble and the subsequent retraction of credit availability
left very few qualified perspective owner/occupant buyers. As is to
be expected, these conditions mean that the majority of foreclosed
homes are already being sold to investors. We believe that a welldesigned bulk sales program will have little upfront costs and have
a very large and positive impact. I would like to start to talk about
these benefits from the ground up, and then well talk about the
upfront costs.
As you likely know, the GSEs currently own thousands of homes
that were foreclosed upon with a tenant in place, tenant-occupied.
In these cases, a borrower defaulted on a mortgage after leasing

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00030

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

25
the property to a tenant family. If these homes are liquidated via
the current process, the leases will not be renewed. The families
will be asked to move, and the homes will be sold, primarily to investors. The Fannie Mae pilot program for bulk sales are these tenant-occupied homes. If a long-term investor purchases these home
through a bulk sale, many of the tenants will be able to stay in
place. By simply short-circuiting the process, we accomplish simple
things. Children stay in their schools, neighborhoods are maintained, and lives are not disrupted.
At Amherst, we purchased the only auction of these types of
homes ever conducted by Fannie Mae. We were able to maintain
one-half of the occupants in their residence. If a successful market
for occupied homes is established, this type of benefit could also accrue to owner/occupants nearing foreclosure.
Another first order benefit of a bulk disposition program is the
increase in speed at which housing is returned back into the market. In the previous panel you heard a lot of discussion about the
inflation, rents, and the tightness of the rent markets. Its important to understand that even though we have not recovered the
jobs lost in the recession, vacancies are dropping and rents are rising. This is a symbol of a very tight market, and is putting pressure on families.
Beyond these first-order benefits, we think a series of bulk sales
will have a direct and positive impact on home prices. Currently,
the investor base purchasing homes is highly fragmented and, as
a consequence, experiences a high cost of capital relative to the
overall market. In other words, investment housing is a cottage industry and has very little access to the equity or debt capital markets. The key to decreasing capital cost, and thereby increasing
home prices back to some semblance of fair value is standardizing
the single-family leasing industry and creating a smooth capital
transfer mechanism.
The depths of the mortgage problem can be measured in several
ways. The Nations REO inventory sits at around 400,000 units, yet
this is but the tip of the proverbial iceberg. Our data shows over
3.3 million mortgages with underlying real estate value around
$430 billion have not received a payment in over 12 consecutive
months. Behind that mountain of real estate lies another six-plus
million units that are either delinquent or are so deeply credit-impaired that they are hanging by a thread. When you contrast these
horrific numbers to the 85,000 units of REO being sold each month,
you realize that either the pace of liquidations has to increase,
which under the current model could drive home prices even lower,
or this backlog will stand as a threat to the economy for at least
another 4 years.
Because of the Fannie Mae pilot programs, we and others have
embarked on building the appropriate platform to shepherd the
necessary capital to the market. Until now, a mechanism for this
purpose has not existed. The work we and others are doing could
very well change the conversation around housing and create a
backstop for home prices.
Its worth adding that without this infrastructure to pass capital
from the markets to housing, the Federal Reserves dramatic monetary policy efforts are pretty much in vain. It does not matter how

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00031

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

26
low bond rates go or how many mortgages the Federal Reserve
buys, if the credit and capital transmission system is insufficient.
In summary, institutional capital allocated to single-family rental
housing can ease trauma to current residents, increase availability
and quality of new housing, produce a significant increase in home
prices, and remove the fear surrounding the backlog of unresolved
defaulted mortgage loans.
Naturally, the question will arise, at what cost? Its a controversial statement, but it may indeed not cost a thing. There is significant discussion about the level of price discount required to attract
bulk buyers. We believe any discount achieved early on will be
short-lived as capital costs fall, and will be minimal compared to
the single asset strategy once all transaction costs are accounted
for. Even if there are small costs to priming the pump with the
first transactions, the price of the next 400 billion sales should be
much higher, and as capital forms around the asset the confidence
builds. No matter what your position is in this debate, its hard to
argue that the status quo is acceptable. The backlog of unresolved
default mortgages hangs as a pall over the U.S. economy. The lack
of credit, lack of confidence, and the continual threat of a tsunami
of distressed sales have conspired to undermine housing and prevent the sectors normal contribution to the overall economic activity and job growth. We believe bulk sales attract new source of capital to housing and will alleviate these fears and potentially unlock
housing, allowing it to once again contribute to job growth and economic activity.
Thank you for the opportunity to testify.
[The prepared statement of Mr. Dobson can be found on page 50
of the appendix.]
Mr. SCHWEIKERT. Mr. Grossinger?
STATEMENT OF ROB GROSSINGER, VICE PRESIDENT, COMMUNITY REVITALIZATION, ENTERPRISE COMMUNITY PARTNERS, INC.

Mr. GROSSINGER. Thank you. And thank you, Mr. Chairman, and
members of the subcommittee for the invitation to testify. My name
is Bob Grossinger with Enterprise Community Partners. We are a
national nonprofit that has been in the arena of financing affordable rental housing for the past 30 years. We have provided upwards of $11 billion in equity, and helped to finance over 300,000
rental units throughout the country.
But prior to this job, and somewhat relevant to this testimony,
I was originally with the LaSalle Bank here in Chicago, and then
acquired by Bank of America. And my first assignment with Bank
of America was to go out to California and work withon the
Countrywide transition, dealing with, what are we going to do with
all of these assets? So, for a fun 3 years
Mr. SCHWEIKERT. Forgive me for interrupting. When does your
book come out?
Mr. GROSSINGER. Im not sure; I think Im blocking out most of
the experience.
But, what was interesting during those 3 years was to look at a
system, as has been previously testified, that was ill-equipped to
deal with what we have now. And when we talked earlier, Con-

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00032

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

27
gressman Schilling mentioned who was at fault. I guess I was, because I was working with Countrywide and that was one of the biggest fault producers that was out there. So, to some extent, I saw
an evil and I was part of it.
I do want to also state that I appreciate what FHFA did, and
Meg Burns, in bringing together some of the large national nonprofits along with some of the for-profit equity funds that are looking to get into this space, to talk about this bulk sale opportunity,
the pilot, and what may happen after that. We had a number of
very good discussions in Washington, as Ms. Burns stated, and the
national nonprofits that were at the table did indicate that we
didnt see the value of any sort of forced marriages between nonprofits and for-profits. We think that has to happen organically.
But, I will say that the best part of those two sets of meetings
in Washington was a marriage that we have been able to make
with a private equity fund, to look at doing things together in three
markets around the country. And when you talk about that marriage, along with what I think is the most important part of this
discussion, you have to look at this issue as it happens at the
ground level. And as I think all of you know, at the ground level
its all about location, location, location. What happens in Maricopa
County in Arizona is very different than whats going to happen on
the south side of Chicago or in Cleveland or in Detroit or in Atlanta. And even within Atlanta, there are different markets, and
there are micro markets in each.
So, our goal, and the purpose, if I get nothing else across in this
testimony, is that were not interested in trying to direct, hamstring, put shackles on private equity as it looks at the markets it
wants to look at, but there are many markets it just doesnt want
to look at. And what we found in our relationship now with this
private equity firm, is we have done some controlling, some education, some bringing capital that we have to the table, to get them
to look at markets that they were skipping over. They just were not
economical to them, they didnt understand them at the micro market level. So, their data analysis was done at the city level, but
within that city, there were many micro markets that could be
helped, that could still be saved.
And so what we did, is we literally put them in a van and took
them on a tour and showed them, with city officials from this particular city, these particular neighborhoods, and now all of a sudden, they want to do business there and they want to do it with
us, so were forming our own fund, the two of us, well form a limited liability corporation and well start buying REOs in those
neighborhoods, that before our partnership they wouldnt enter. So,
its how do you, from a nonprofit standpoint, its both, how do we
partner effectively without a shotgun wedding, and, also, how do
we target those neighborhoods the private equity is simply going
to skip.
I think your motto in Arizona, Congressman, what you have been
doing is a great example of when you maximize private capital
with a demand, and be able to produce, I think you said over a
thousand properties that you have been able to take under management and rent. However, when I look at bulk sales, my big fear
is that the losers get, politely said, chucked away.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00033

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

28
In all of our interviews with private equity funds over the last
few months, ones that have been in existence for a while and the
ones that are forming now, and there if you added up all the numbers that you have read in The Wall Street Journal or in
Bloombergs, its $5 billion to $7 billion of equity that has been
forming for this. What we found is that when they buy in bulk, the
bottom 20 percent of the assets that they dont want, they tend to
walk away from.
That may change as the newas these new formations happen.
We want to make sure that it doesnt happen, that you dont look
at certain neighborhoods and say, okay, I got a good deal by buying
100 properties, and 20 of them I was able to work with the homeowner to save them. These are note purchases. If you look at REO
purchases, I could sell 20 of them above market, I can sell 20 of
themand you go down that waterfall. But when you get to the
bottom 20, you know what, these are going to cost me $90,000 to
rehab. Im going to walk away.
So, I would just ask that in any next set of bulk transactions, we
look at monitoring so that walk-aways are taken care of. We look
at whether theres going to be financing available from the GSEs,
that sort of team.
And last but not least, Im going toI was going to talk about
this, but Im going to refer to Mary Kenney to talk a little bit about
the mortgage resolution fund we have created with her leadership
here in Illinois, to purchase notes to save homeowners.
[The prepared statement of Mr. Grossinger can be found on page
58 of the appendix.]
Mr. SCHWEIKERT. Thank you so kindly. And what a fine intro.
Ms. Kenney?
STATEMENT OF MARY R. KENNEY, EXECUTIVE DIRECTOR,
ILLINOIS HOUSING DEVELOPMENT AUTHORITY (IHDA)

Ms. KENNEY. Thank you, Mr. Chairman, and members of the

subcommittee. My name is Mary Kenney, and I am the executive
director of the Illinois Housing Development Authority. Like most
HFAs, IHDA started out as a bonding authority. It was created in
1967, and at that time had just a dozen employees and very few
assets. Today, its an agency that has more than 260 employees
and $2.5 billion in assets.
Since 1967, we have financed more than 200 units of affordable
rental housing, comprising nearly 1,800 developments in every
county in the State. And we do so in partnership with the private
sector, acting as a lender, selling tax-exempt bonds and other mortgage-backed securities in the capital markets to finance our mortgages.
In addition to our multifamily business, we operate an affordable
homeownership lending program, a program which has struggled
in recent years. As the mortgage market accelerated and exotic
loan products became the norm, our program, which provided just
a 30-year fixed rate, really couldnt compete. Despite pressure from
Wall Street to change our marketing practices in order to boost
originations, we held firm to our model, and the program all but
shut down in 2007. Today, the program is again thriving, providing
needed liquidity to a market that sorely needs it. And, our origina-

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00034

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

29
tions have gone from zero in 2009, to an expected $250 million this
year.
For the last several years, our work, as yours, has taken place
against the backdrop of the foreclosure crisis that has shaken our
housing industry to its core. The crisis has been particularly acute
in Illinois. And as a result, my agency has focused its full attention
on how to help homeowners and communities within our State.
We have launched two programs to help combat the rising tide
of foreclosures, and several new programs aimed at reducing the
number of vacant properties within our neighborhoods. We believe
that the GSEs can play a necessary and important role in assisting
our work in both of these areas. And Ill direct my comments to the
REO-to-Rental later in the context of the work that we have been
doing.
Illinois was lucky enough to be one of the 18 Statesor unlucky,
depending on how you look at itselected to receive Hardest Hit
Funds from the U.S. Treasury. In September of last year, we
launched a program, and to date we have helped more than 2,200
Illinois homeowners keep their home, and we continue to provide
assistance to new households at a rate of about 20 per day. I am
very proud to say that Illinois now has the second highest program
in the country, second only to California, which has triple the resources and employees.
In addition to our work on HHF, as Mr. Grossinger mentioned,
the State has partnered with a number of entities from the private
sector, including Enterprise, on a very innovative program utilizing
some of our HHF funds. We set aside $100 million in Hardest Hit
Funds to create the Mortgage Resolution Fund Program.
In simple terms, the program aims to keep families in their
homes by utilizing the funds to purchase delinquent mortgages at
a discount, and then leveraging that discount to permanently modify the mortgages of qualifying households to an affordable level.
The program is the first of its kind and is the only program in the
Nation that utilizes the current reduced market value of the property to the benefit of the homeowner so that they can stay in their
home.
Over 100,000 new foreclosures were filed in Illinois last year, and
we believe that stopping the flow of new REOs is the best and most
cost-effective approach to combating the plague of vacant properties
in our community.
I believe that the GSEs have an important role to play in this
regard. To date, all of the loan purchases have been made through
the private sector. In order to work more efficiently and to bring
the program to scale, we believe that the GSEs must participate by
selling pieces of their portfolio at the current market rate.
IDHA is also helping communities struggling with the aftermath
of foreclosures, working to alleviate the huge inventory of vacant
properties. IDHA received a total of $58 million under the Federal
Neighborhood Stabilization Program, and through this program
IDHA has committed resources to redevelop over 450 vacant foreclosed and abandoned properties. We are now leveraging these investments through an innovative new State program.
In February of this year, Governor Quinn launched his own program, known as the Illinois Building Blocks Pilot Program. Build-

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00035

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

30
ing Blocks is a multifaceted and comprehensive approach designed
to help communities and their residents along every phase of the
foreclosure continuum. The program employes a three-pronged approach. First, it aggressively targets existing resources to struggling homeowners. Second, it provides direct financing to developers willing to acquire and rehabilitate vacant homes. And, finally, the program provides a robust and aggressive homebuyer financing package, including a $10,000 downpayment assistance for
homeowners willing to purchase a vacant property within 6 of the
selected communities. The goal is to stop the flow of new vacant
properties and to restore existing vacant properties to productive
use.
One important way the GSEs can help States address the vacant
properties is by assembling available properties by ZIP code and
making them available for purchase at a reduced rate through governmental entities that agree to assist in financing their acquisition and rehabilitation by private entities. This would allow States
to address large lots of vacant properties in their communities in
a way that is consistent with local planning and will have a real
impact.
While we are excited that Chicago has been chosen as one of the
pilot communities for the REO-to-Rental, we had the following observations. A scattered approach will not be effective. Our understanding is that there are currently 99 properties in the Chicago
region, scattered throughout the region. This is not enough to provide a critical mass, will be difficult to manage by the investor, and
will likely have no effect on any given neighborhood. A local and
leveraged approach is optimal to best serve the public interest and
stretch the taxpayers dollar to maximum effect. While minimizing
losses to the GSEs is the ultimate goal, it should be balanced
against the needs of our communities and stabilizing property values to all our citizens.
Finally, I wanted to make one note to the committee on a slightly
separate but related topic. And that is, there has been a bill that
has been submitted to the Congress on two occasions related to a
Ginnie Mae wrap for the FHA Risk Share Program, and I think
that all of the vacant properties in our communities stand evidence
to the tremendous need for affordable family rental housing. The
bill that was proposed would provide a Ginnie Mae wrap to the existing Risk Share Program that the HFAs administer. And it actually hasCBO found that it would save the Federal Government
$20 million over 10 years, so there is no net cost to the budget. It
also would not expand the Federal Governments role in housing.
I would be happy to elaborate on that for you.
[The prepared statement of Ms. Kenney can be found on page 68
of the appendix.]
Mr. SCHWEIKERT. And well beg you to send us a copy. I know
were a little over time.
Ms. KENNEY. Sorry.
Mr. SCHWEIKERT. Mr. Pruess?

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00036

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

31
STATEMENT OF DICK PRUESS, ON BEHALF OF COMMUNITY
ASSOCIATIONS INSTITUTE (CAI)

Mr. PRUESS. Mr. Chairman, members of the subcommittee, my

name is Dick Pruess, and I live in the Castlegate Homeowners Association in Pasadena, California. Thank you for the invitation to
testify this morning on behalf of Community Associations Institute.
CAI is the only national organization dedicated to supporting
community associations and association homeowners. There are approximately 62 million residents living in 315,000 associations
across the Nation. Community associations are more commonly
known as homeowner or condominium associations. Our homeowners are facing a crisis, and I believe taking into consideration
a unique perspective of community associations will help the Federal Housing Finance Agency with its REO pilot program.
I recommend that FHA take at least three actions to help homeowners living in community associations. First, FHFA should make
sure outstanding liens and arrearages on the property are satisfied
prior to sale. It seems to me as an owner in a community association, where about 25 percent of the taxpaying owners in the country reside, and in California its over 33 percent, that these packages of homes cannot be sold to investors in good conscience if the
issue of unpaid back assessments and arrearages have not been
cleared up.
Second, FHFA can make sure that servicers are foreclosing and
reporting a change in title in a timely manner. Completing the
foreclosure process for loans that cannot be modified, and recording
a change in title, will improve outcomes for both the GSEs and
community associations. When the foreclosure process breaks
down, assessments go unpaid for longer periods of time, more services have to be curtailed by the associations, and the resulting lack
of maintenance and repairs can lead to declining property values.
Third, FHFA must ensure that investor purchasers will understand community associations and the obligations of owning property in an association. Given the unique aspects of property ownership in a community association, CAI urges that potential investors
be required to demonstrate experience in managing property located in a community association. If the investor doesnt have association experience, I believe it is appropriate to ask how they will
acquire this expertise. We need responsible investor/owners in our
communities. Investor ownership in neighborhoods that are designed for owner occupancy can be a source of frustration if the investor/owner does not take their responsibility seriously. Timely
payment of assessments on properties by the investor directly into
the association during their rental period or until sold to a third
party is imperative. Reserving, protecting, maintaining, and insuring properties will be required by the association. Investors should
understand that associations will want to have a copy of the lease
on file and will need a single point of contact to resolve any outstanding matters. Investors should expect associations to be interested in the restoration of neglected properties.
I will finish with a few observations. Lenders and servicers have
failed to adequately preserve and protect their collateral before,
during, and after foreclosure. Lending institutions that have not
foreclosed on hopelessly delinquent owners have caused harm to

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00037

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

32
community associations. Some of these owners stay in the property
and pay neither a mortgage nor their assessments. Take my own
association as an example. My small 48-unit association is professionally managed with educated and trained board members. We
have had three foreclosures on two units, two short sales, and one
delinquent owner still living in their unit. The accounts receivables
of my association now exceed 60 percent of our annual operating
budget. Expressed differently, our unpaid assessments total in excess of the amount one unit would owe over the course of 15 years.
This shortfall is due solely to these six properties. The monthly assessments for all owners has been raised in the past 2 years by 15
percent annually. Almost 75 percent of that increase is due to the
nonpaying owners. The other owners in the association, including
myself, have shared $54,000 in higher housing costs in the past
year-and-a-half as a result. A number of our owners are on fixed
incomes. One more assessment increase and some of my neighbors,
who have specifically told me this, will have to sell or move out and
rent their unit. They wont be able to pay their mortgage and assessment combined. We need a way to resolve problems like these
in Enterprise and REO, and community associations will be eligible
for this program.
I believe implementing the policies I have recommended will improve returns for the Enterprises and provide some equitable treatment for the homeowners who have shouldered the financial burden of maintaining these properties. This is a critical issue for community associations and CAI members will continue to work as
partners with the Federal Government to ensure the programs
success. Thank you.
[The prepared statement of Mr. Pruess can be found on page 80
of the appendix.]
Mr. SCHWEIKERT. Mr. Pruess, thank you so very much.
Mr. Huizenga?
Mr. HUIZENGA. Mr. Chairman, I appreciate this, and as I think
I had explained, I need to duck out for a flight. I got stuck with
the earlier not-so-good flight that my colleagues who had the foresight to make sure that they didnt come home earlier than I did.
Mr. SCHWEIKERT. Its clean living.
Mr. HUIZENGA. Is it? Okay. You Arizona guys, I tell you. Anyway,
quickly, Mr. Dobson, and probably Ms. Kenney, directed to you, too,
but I hear consensus on the panel, and anyone who has addressed
this, that we need to move these inventories through and out of
GSEs. Okay, youre both nodding. What I was hearing, though, is
your concern, Ms. Kenney, is that, I think it was 99 properties that
you suspect are available here in the Chicagoland area.
Obviously, that was going to be one of my questions, where exactly? Because thats very different whether its Amherst to North
Shore to wherever theyre gonna be. Whatever. Those are different
areas and you seem to be calling for an intermediary; right, is
that
Ms. KENNEY. Absolutely. I think that there needs to be a localized approach. And I actually think that the State HFAs offer a
perfect opportunity for that. My agency in turn is partnering with
six local communities. And youre right, its a distinct need in different communities, and I really question the ability of an outside

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00038

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

33
investor that is just strictly profit-oriented to come in and manage
99 properties that were told are scattered throughout the city.
Mr. HUIZENGA. So, Mr. Dobson, as one of those profit-driven
Mr. DOBSON. Yes, it beckons.
Mr. HUIZENGA. companies that its going to come in first.
Mr. DOBSON. Sure.
Mr. HUIZENGA. Do we need that intermediary, do we need to
have that or not?
Mr. DOBSON. I think itsfrom our perspective, its important to
understand that theres a robust asset management infrastructure
that exists in the United States today for this purpose. So, no one
isour business didnt say no one, our business plan is not to try
to make those consumer-facing decisions at a central location. Its
to engage local property managers. In the pre-purchase diligence
states, to understand prepared budgets marketability, written
equivalence, as well as to deal with consumers loan basis. So, as
this mechanism is scaled up, that might be an opportunity for our
company to expand into its own branches. But in the early phases,
this is very much a hands-on, one-at-a-time asset. And its worth
noting that we didnt get into this crisis by any other way than producing one bad mortgage at a time. And were not going to get out
until we renovate and rehabilitate and produce and construct a
producing asset one at a time.
Mr. HUIZENGA. So, do we or dont we need to have this?
Mr. DOBSON. Our plan, we have been buying homes, our plan is
to do it with the existing local for-profit asset managers. Housing
is a very diverse asset class, so it doesnt mean that theres not a
place for nonprofits, theres not a place for house advantage agencies, in certain segments of the market Im sure that it will increase efficiency in certain sectors.
Mr. HUIZENGA. So, its not ringing hollow; right?
Mr. DOBSON. No, its not ringing hollow.
Mr. HUIZENGA. Yes.
Mr. DOBSON. Its not ringing hollow, but that level of expertise
is needed and its available.
Mr. HUIZENGA. Okay. I appreciate that. And with that, I yield
back, thank you.
Mr. SCHWEIKERT. And, thank you, Mr. Huizenga. And fly safe.
Mr. HUIZENGA. See you back in D.C.
Mr. SCHWEIKERT. Mr. Schilling?
Mr. SCHILLING. Very good. I just want to thank the panel again.
Ms. Kenney, you had indicated that there was going to be, or I
think they are doing it already, the $10,000 payment, $10,000
downpayment assistance. Have you guys done studies, for example,
of showing, because I know that where youre trying to go is the
end game of trying to get those things back up and running, somebody is in there living in them, of course. But have you done a
study of the investment back on that $10,000, and then, like somebody stayed in the house for a specific period of time?
Ms. KENNEY. My agency offers a myriad of downpayment assistance, and did even prior to the crisis. And we did not see higher
delinquency levels within that portfolio. Our portfolio was really affected, like everyones, I think. We obviously did no subprime, I testified to that. But we saw, actually, we had very low rates in delin-

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00039

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

34
quency, probably through 2009 and into 2010, like 1 or 2 percent
in our portfolio. And it was only the unemployment that really triggered that. So, we do have some historical experience with that.
And I should note that I only have 5 minutes, but its a very specialized program. And the communities are very much involved,
and we have pre- and post-purchase counseling thats associated.
The homeowner is actually connected to a counselor through that
process, as well. So, its something thatits obviously part of a
pilot program that was launched by the Governor, but that were
going to monitor very closely. So, we had probably 12 reservations
under the program, and its been for like 30 days. I think early
signs are that it has provided some incentive. Vacant homes dont
sell; they dont show as well. So, it has provided some incentive for
people to take a second look at these vacant properties.
Mr. SCHILLING. Very good. One of the thingsI was born and
raised in the west end of Rock Island, where theres a lot of houses
that I have seen them put well over $100,000 into these houses,
and the market value there is $40,000 to $50,000. Sometimes were
better off to kind of just level those, some of the houses that are
out there, rather than to continue to rebuild those. But anybody
can answer this one, I guess. Do you believe that the pilot program
will be successful? Mr. Dobson?
Mr. DOBSON. I believe it will. I think that theres significant investor interest. And I think that it will help allay some of these
fears about the complexity of the prepurchase diligence and the operations.
Mr. SCHILLING. Okay. How do we judge success?
Mr. DOBSON. The ultimate judge will be the improved home
prices, and consumer confidence around housing, and building and
economic activity. And I dont think that this is some lofty 10-year
measure, this is something youll see rather quickly. Home prices
usually react favorably to a net lower cost accounting.
Mr. SCHILLING. I do agree. We have to figure out some way to
get a floor on all this so that we can get our market back up and
rolling. And then if it is successful, however we measure success,
which I think youll probably be able to get a pretty good idea,
should we expand into other localities across-the-board?
Mr. DOBSON. I think we should. I think this is a cross section of
every market. This isnt a geographically focused issue. This is a
Theres a point in time when investorwhen consumer base simply
doesnt qualify for mortgage in the volume thats needed to absorb
this real estate. So, as this program should expand, it should probably be more focused on the kinds of assets that are involved, the
price points and some assets that vary in cost and care, like economy and some things. But I think it absolutely should be expanded,
and where institutional investors can compete with private, with
individual investors, then they should be allowed to compete.
Mr. SCHILLING. Very good. Im kind of torn, because both of
these, I like the idea because it still gives some of the most vulnerable, with what Governor Quinn is doing, with helping out, but at
the same time, were helping put that floor down. And so, Im going
to go ahead and yield back.
Mr. SCHWEIKERT. Thank you, Mr. Schilling. Now its my turn.
Sorry, this is one of the most important subjects in my world. Do

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00040

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

35
I still have someone from the GSEs in the back listening? All right.
In that case, were going to have to send a note.
Mr. Pruess, one of the single, biggest complaints I have in my
congressional district office back in Scottsdale, is we have lots of
A choice, and I had very close relationships, I have been the
county treasurer and helping them with their common areas and
those things, is coming in and saying, we have a housethe folks
have been under foreclosure for 3 years, 2 years, they havent paid
an HOA payment in that time, why wont they do the foreclosure?
We need to start having them pay their fair share, because everyone else now is having to cover the lack of their HOA costs. In California, like in Arizona, when theres a foreclosure it severs any of
the HOA liens you have placed on the property; is that also true
in California?
Mr. PRUESS. Its true if its a trustee sale or the foreclosure itself
goes through. If it goes to a short sale, then generally what happens is the lending institution will negotiate with the board. If the
bank takes its percentage of the money which they wanted, and its
agreed to, then theyre asking the association to give a like percentage.
Mr. SCHWEIKERT. So, in your particular case, when they take forever, or an elongated period of time to finally pull the trigger and
execute the foreclosure
Mr. PRUESS. Were trying to get a paying owner in the building.
Thats the biggest problem.
Mr. SCHWEIKERT. And this is one of those unintended consequences. I have a couple of HOAs, actually, one in central Scottsdale, its been there for many years, that literally is in major, major
trouble because everything that goes up for sale sells, but they
have a handful of properties that have been under foreclosure and
theyre both withinthe GSE is waiting to pull the trigger to do
the foreclosure. And theyre going on, I think, 2, 212 years now, for
some, and we cant get an answer why they wont do the foreclosure.
Mr. PRUESS. Those 15 years I mentioned, we have one owner who
is still living in his building, in his unit. He bought his place for
$500 down, which isits a crime, but people were allowed to take
out loans like that. He wasnt qualified; he was a musician.
Mr. SCHWEIKERT. But I guess the point I was trying to go to, and
seeing if you agree, is sometimes the inaction from the GSEs, or
whoever, whoever the servicer is, because in some ways we blame
the GSEs, but reality is something in the servicing process, so I always have to be a little careful to blame those in the process. They
dont understand the unintended consequences of what they do,
also, to the rest of the neighborhood, let alone the HOA.
Mr. Grossinger, you made the comment aboutnow, I understand your experience was also in buying impaired paper, and having been around part of that business, yes?
Mr. GROSSINGER. Yes.
Mr. SCHWEIKERT. You have that 20 percent of the paper thats
unsavable. That you just say, write it off. But when youre buying
hard asset, hard real estate asset, a handful of you cannot walk
away from a handful of houses that devastates the cap rate. Would
you then agree, though, that if theyre going to do the bulk sale,

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00041

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

36
then they need to make a mechanic where those properties that are
the problem actually need additional love and attention, or they
need to be major rebuilt, that there needs to be a very simplified
process, that if you and I went out and bought 100 houses, we have
these 6 over here that are scattered and they have problems, that
we need to be able to sell them to the family or the individual or
another investor who is willing to rehab them, do whatever with
them.
Mr. GROSSINGER. I think also, and all of my knowledge in this
area comes from the interviews we did with the private equity
firms as we were both setting up the Mortgage Resolution Fund
with the Illinois Housing Development Authority, but also as we
now have entered into this partnership with the private equity
fund to do what we think is important, in those markets that we
think the private sector will ignore or not just
Mr. SCHWEIKERT. But you agree that there needs to be at least
a clean process to sell the brain-damaged properties?
Mr. GROSSINGER. I think its actually more than that. I think if
we had eitherand Mary called it an intermediary, you could call
it a partnership without any sort of legal partnership, if you understood that those six problem children, some of them may need demolition. When a bulk sale is offered up, there are going to be winners, there are going to be moderate winners, and there are going
to be losers. We just want to make sure that the losers arent being
ignored. And so, if theres a different disposition strategy than a
hold and rent for a period of time, if demolition is the right disposition strategy, if it needs a little more activity to sell to a homeowner, I think any of those should be
Mr. SCHWEIKERT. But wouldnt it be natural economics to say,
hey, if Im paying property tax on the improvement of this property, and theres no way Im going to rent it, and my rehab costs,
and I cant get my rate of return, we run the tractor through it so
at least I minimize my property tax exposure. Isnt there some
basic law of economics thats going to help me
Mr. GROSSINGER. Thats exactly what I was saying. There are
many, many properties for which the outcome shouldnt necessarily
be predetermined. There should be some way for the bulk buyer to
be able to come back and say, here are the economics on this particular house. There is no way in this the neighborhood, I would
have to put $100,000 into this property and I would get $400 a
month rent. Look at the number of vacant properties, let me demolish it. There should be some conversation along those lines. But it
needs to be a conversation, not a fiat.
Mr. SCHWEIKERT. I think you and I are pretty much saying the
same thing. I think actually it also happens just from rational economics. In our world, every time weour average was for every
100 houses we bought, we had 1 or 2 that we had to get off our
books. There was no way I could afford to re-pipe the house or this
and that. But I always had other people lined up. And often, we
would take little hits on them, but we got them off our books because we had to cover our costs. We actually even had one that we
made a deal and sold under our cost to one, the nonprofit churchbased housing groups in ourin a neighborhood because they

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00042

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

37
wanted it and I didnt. So, Im hopeful that there are actually some
rational economics that also make that happen.
Mr. GROSSINGER. There has to be some decent discussion on it.
There are some national entities being formed between some of us
national nonprofits. To be able to take those lowest of low-value
properties and do something, there are land banks being informed.
Mr. SCHWEIKERT. Good.
Mr. GROSSINGER. But the conversation has to take place.
Mr. SCHWEIKERT. The land banks almost become sort ofits
something that stands on its own. I found on some of the small
properties I would find, a littlea family would come to me and
say, look, were going to do it. And that was theirMs. Kenney,
right now in Illinois, if today I receive my notice of foreclosure, and
this is a judicial mortgage State; correct?
Ms. KENNEY. It is.
Mr. SCHWEIKERT. What would the mean time be for that foreclosure to be executed or the investors property rights in that loan
instrument to be executed?
Ms. KENNEY. It depends on where in the State its filed. In Cook
County, its particularly long. Theres a foreclosure mediation program that I think is pretty
Mr. SCHWEIKERT. In Cooklets take the worst-case scenario.
Ms. KENNEY. 18 to 24 months, probably.
Mr. SCHWEIKERT. Okay. So, 24 months, which is actually better
than I thought it would be. Two years?
Ms. KENNEY. Yes, I would say thats right.
Mr. SCHWEIKERT. Because of that type of mechanic, should Illinois lenders require higher interest rates because theres an additional risk premium because of the legal process here?
Ms. KENNEY. Im sure its something that lenders will start to
look at. I dont think that people ever anticipated the prices as they
exist today. And part of the delay was caused by lenders. And Bank
of America seized foreclosures in October of 2010. No offense.
Mr. GROSSINGER. None taken.
Ms. KENNEY. October of 2010, and I think just started resuming
a portion of the foreclosures just in January of this year. So, it
wasnt all imposed by the process, per se. But I think that you
make a fair point. I think that the economics of it are such that
Illinois will start to look at those issues. And Illinois is not the only
State with that issue, obviously.
Mr. SCHWEIKERT. And two last ones. Mr. Grossman, you also
made the comment about Maricopa County, but if you and I would
step back to, yes, lets go 3, 312 years, people thought people like
me were insane for going out and buying property, after property,
after property, because Maricopa County is never coming back,
there are huge numbers of houses, were so overbuilt. You have a
decade of inventory. Now, we look smart. But would you be willing
to debate me just a little bit, is in the deed of trust State, some
of these States that hadIll use a more aggressive deed of trust,
foreclosure mechanics, that by moving inventory actually helped a
stimulative effect, but also got rid ofI used to have a housing professor who said, We all grow up here, the world moves in supply
and demand, and in housing it doesnt. In housing, its anticipation
of supply and demand. And if Im always anticipating another

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00043

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

38
wave of foreclosures, ityes, its neat because I get to control the
timerthat actually thats one of the great sins in many of the
marketplaces around the country, is theyre not doing those things
to mitigate the anticipation of the future supply.
Mr. GROSSINGER. I think if you go back historically to the protection of individual property rights, and some States took that more
seriously and put in more protections and more protections, and
longer redemption periods and more protections. I do think here in
Cook County there isthe recent recognition is really devastating
when it comes to vacant properties. And so, for Cookthere is a
bill in Springfield right now to create a fast track foreclosure process for vacant properties. One particular servicer has negotiated
with the chief judge of Cook County to do fast track foreclosures
on vacant properties. I will give you one statistic.
Mr. SCHWEIKERT. And if you come across that article, I would
love to see that, because I appreciate that information.
Mr. GROSSINGER. Sure. Bank of America, my former employer,
right now has 1,800 vacant properties within the City limits of Chicago; 90 percent of those are pre-foreclosure. So, they cant do anything with them even if they wanted to. Were trying to work with
them to change the judicial foreclosure process for those vacant
homes. And in that regard, as a former legal aid lawyer, I can step
back and say, I dont have to worry about individual property
rights to the homeowner, because there isnt anyone living there.
Mr. SCHWEIKERT. But in many ways, youre also speaking to the
HOA problem.
Mr. PRUESS. I will give you some quick statistics inbut were
a nonjudicial State in California. From date of notice of default
until date of sale, its 311 days, is the average today in California.
And because of rules out there, over 60 percent of the units that
go to sale on the courtroom steps, go back to the bank. They have
so many rules that you can cancel them for, that it would go back
to the bank. Its only roughly 10 to 11 percent of the units that get
sold to a third party, which is usually an investor. And the investors time, then, to sell, it runs, I believe its something like 134
days. If the bank takes it back and they go to resell it again, their
time is 184 days. So, if you add the 3 of them together, and they
finally sell it to the investor the second time around, and the investor sells it, youre looking at just under 2 years of time.
Mr. SCHWEIKERT. But the moment the foreclosure happens, the
in your case the HOA fees are attached to the property, whether
it is owned by the bank or an investor.
Mr. PRUESS. Not
Mr. SCHWEIKERT. No, they would havethey run with the
Mr. PRUESS. But then its the
Mr. SCHWEIKERT. The foreclosure is the severing instrument.
And onceIm the bank and I own it, I have takenits REO property, I owe you the HOA.
Mr. PRUESS. Thats what the law says. And I hope you have been
ablehad a chance to look through these pie charts that are back
here, because youll see how bad these banks have been performing
Mr. SCHWEIKERT. But the banks
Mr. PRUESS. on doing what theyre supposed to.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00044

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

39
Mr. SCHWEIKERT. So, youre saying, but the banks owe it, but
theyre not paying.
Mr. PRUESS. Theyre not paying.
Mr. SCHWEIKERT. Okay. Thats aone off issue.
Mr. PRUESS. And I know thatthe State and Federal level, that
they are performing. But theyre not performing. They are not performing.
Mr. SCHWEIKERT. Because the foreclosure is the severing activity.
Mr. PRUESS. I have had the privilege of meeting Mr. Manzullo
in a unit that he was trying to buy in Pasadena. And I have two
Countrywide homes owned by Bank of America, so
Mr. SCHWEIKERT. We can have some side stories.
Im going to let Mr. Schillinghe had a couple more questions,
and then I want to finish with one or two for Mr. Dobson, and then
well let you go back and dance in the rain.
Mr. Schilling?
Mr. SCHILLING. Very good. I think this one could go to my Hawkeye friend here. Do you believe that investors are willing to partner
with the local community-based organizations to help to stabilize
and improve the market conditions?
Mr. GROSSINGER. Some are, some arent. I thinkI remember
Meg Burns said something like theyre looking for investors who
want to be profitable yet civic minded. And Im not sure what that
means, but in my conversations and travels, I think there are a
number of private equity funds out there that recognize that
theres value added by partnering with organizations that understand things at the block-by-block level. Because real estate in cities like Chicago can change dramatically within a three-block radius. So, I do, I think theres enough out there to make it. Where
those partnerships are going to work, its going to be very successful. And it doesnt have to bewhat were doing with our newfound
partner is an actual economic partnership where were building a
fund together and well act in a 50/50 partnership. It doesnt have
to be that. But in an advisory capacity, or in some form taking the
skills the nonprofit brings to bear, the HFAs bring to bear, only
makes the business model better, to be honest.
Mr. SCHILLING. Very good. And then, where do investors expect
to obtain financing for these purchases? I guess anybody could answer that.
Mr. GROSSINGER. Oh, its all the silly money thats floating
around in this country. Billions and billions of dollars is looking for
a better return than in a CD.
Mr. SCHILLING. Thats not hard to do.
Mr. GROSSINGER. No.
Mr. SCHILLING. Okay. With that, I yield back.
Thank you, sir.
Mr. SCHWEIKERT. Mr. Dobson?
Mr. DOBSON. Yes, sir.
Mr. SCHWEIKERT. Over the what, 3-year period, how many units
have you acquired?
Mr. DOBSON. We will have purchased about 260 to 270 units.
Mr. SCHWEIKERT. And what do you think your capacity and appetite is?
Mr. DOBSON. Now, its tens of thousands.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00045

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

40
Mr. SCHWEIKERT. Do you care when taking down an individual
property or package, whether theyre already leased or vacant?
Mr. DOBSON. The already leased properties require a certain
level of management that the empty properties do not. So, I think
that you have to understand what goes into that. But, by and
large, they are more attractive properties and more solid properties.
Mr. SCHWEIKERT. Your model, are you holding the properties?
Mr. DOBSON. This is a long-term, yes, sir.
Mr. SCHWEIKERT. So, in many ways youre trying to build an annuity, or a rental.
Mr. DOBSON. Right. We think that this is a new asset class.
Mr. SCHWEIKERT. Yes.
Mr. DOBSON. The mobility in the markets blazed a nice trail, and
the capital has not been in the sector for a long time, because mortgages basically displaces economically returned capital.
Mr. SCHWEIKERT. So, youre approaching it as an apartment
building, just with geographic separation.
Mr. DOBSON. Very long hallways.
Mr. SCHWEIKERT. Yes, very long hallways. And, actually, that is
a running joke in our side of the business.
Mr. DOBSON. Right.
Mr. SCHWEIKERT. So, obviously, you get the humor in that. Have
you had the experience of when you have acquired a property that
has been recently foreclosed on, have you participated actually in
being on the bidding side?
Mr. DOBSON. Sure. Sure.
Mr. SCHWEIKERT. Have you had the experience of keeping former
owners in the properties?
Mr. DOBSON. Yes.
Mr. SCHWEIKERT. Share with us your experience.
Mr. DOBSON. Sure. In Phoenix, we purchased homes right off the
courthouse steps. And we really dispatched
Mr. SCHWEIKERT. Im so glad youre not my competitor. I had to
give up the business because of that, so
Mr. DOBSON. It has become quite a feverish market. But we really dispatch someone to the home, and oftentimes the homeowner
is still there. We present them with a lease application, more often
than not they qualify, and they stay. So, the unfortunate part is
because of this plan to draw out the liquidation cycle that was at
the Federal level, many times the homeowner has given up before
the foreclosure.
Mr. SCHWEIKERT. This is a pretty powerful point, and I wish people would listen. Im sorry to be speaking in first person, but about
20 to 25 percent of our tenant base were the former owners, with
hope one day to buy the property back.
Mr. DOBSON. Thats right.
Mr. SCHWEIKERT. And they wanted their kids to still go to the
same school, and their mother-in-law lived across the street, which
might have been a reason to leave, but, and yet because of the way
you were acquiring properties, you were able to get to theeven
though theres that horrible emotional experience
Mr. DOBSON. Right.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00046

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

41
Mr. SCHWEIKERT. but create some lineage of stability where
theres relationship to the property.
Mr. DOBSON. And we think that would have been much more
successful had we been able to purchase the properties when the
homeowner was 6 or 8 months delinquent, and it was apparent
how the story was going to end. If we buy homes after the homeowner has been delinquent for 18 months, many of the homeowners
have already made plans and vacated their properties.
Mr. SCHWEIKERT. By saying that, youre also making the argument for if youif you cannot mitigate it, theres not a short sale,
theres not ability to rebuild the loan, then the stabilizing factor is
move to the inevitable sooner.
Mr. DOBSON. Many of these homes we purchased for $100,000
had $300,000 mortgages on them. The homeowners were paying
$1,800 a month for the first mortgage and $300 a month for the
second mortgage. We leased the home back then, for $850 a month.
This is a traumatic situation, but itsfor the homeowner to just
sit and suffer and service this $300,000 worth of debt would have
broke them over time. So, in essence, a lot of whats happening on
the ground level is a very rational decision from homeowners to no
longer support the unsustainable and irresponsible level of that.
Mr. SCHWEIKERT. On your average property that youre acquiring, and youre obviously acquiring in the Maricopa County markets, and I dont know what other markets, your average takedown, how much in rehab are you doing to each property?
Mr. DOBSON. Were spending about $8,000, and its just an average, I would say that we really either spend
Mr. SCHWEIKERT. Ours is about $6,700, sorry.
Mr. DOBSON. Right. So, about $8,000. And we tend to either
spend $3,000, or sort of $18,000 or $20,000, which seems to be pretty big, a pretty big barbell there. But its an extensive rehabilitation, because the rental markets are unbelievably competitive. We
pride ourselves in the data that we gather and were able to get
down some interest and infrastructure is driving this thing.
Mr. SCHWEIKERT. So, with that variance, literally for every hundred houses youre buying, youre ultimately spending
Mr. DOBSON. About $1 million.
Mr. SCHWEIKERT. Yes, $800,000.
Mr. DOBSON. And local, thats not a big investment, for every 100
homes.
Mr. SCHWEIKERT. Okay. As we get ready to close the panel, anything that we have not heard and put into the record that the
panel believes we should share at this point?
Thank you for participating. I must tell you, each of you have
some things Im really interested in, I may be sending you some
notes and asking you to comment for the record.
The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing.
Without objection, the hearing record will remain open for 30 days
for Members to submit written questions to these witnesses and to
place their responses in the record.
The hearing is now adjourned.
[Whereupon, at 10:55 a.m., the hearing was adjourned.]

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00047

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00048

Fmt 6633

Sfmt 6633

K:\DOCS\75726.TXT

TERRI

APPENDIX

May 7, 2012

(43)

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00049

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

44

Statement of
Meg Burns
Senior Associate Director for Housing and Regulatory Policy
Federal Housing Finance Agency

Before the U.S. House of Representatives Committee on Financial Services,

Subcommittee on Capital Markets and Government Sponsored Enterprises
"An Examination of the Federal Housing Finance Agency's
Real Estate Owned (REO) Pilot Program"

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00050

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.001

May 7, 2012

45
Statement of Meg Burns
Federal Housing Finance Agency
Before the U.S. House of Representatives Committee on ~Financial Serviccs,
Subcommittee on Capital Markets and Government Sponsored Enterprises
"An Examination of the Federal Housing Finance Agency's
Real Estate Owned (REO) Pilot Program"
May 7, 2012
Chairman Garrett and Ranking Member Waters, thank you for inviting me here today to testify
on the Federal Housing Finance Agency's (FHFA) Rcal Estatc Owned (REO) Initiativc. I am
Mcg Bums, Senior Associate Dircctor for the Office of Housing and Regulatory Policy at FHFA
and I am responsible for managing this project.
As you know, FHFA regulates Fannie Mae, Freddie Mac, and the 12 Federal Home Loan Banks,
which together support over $10 trillion in mortgage assets nationwide. Since 2008, FHFA has
also served as the conservator to Fannie Mae and Freddie Mac (the Enterprises), a responsibility
that the agency takes very seriously. In that capacity, FHFA has focused on minimizing losses to
both companies through tighter underwriting standards, more accurate pricing of risk, and
aggressive loss mitigation strategies.
The full array of Enterprise loss mitigation programs are designed to keep families in their
homes whenever possible, pursue alternatives to help families avoid foreclosure when a
mortgage modification is not feasible, and finally, move to foreclosure expeditiously when
necessary. The objective of all of these efforts is to facilitate the stabilization of communities
and neighborhoods.
My remarks today will focus on the disposition of properties that are conveyed to Fannie Mae
and Freddie Mac through the foreclosure process. Today, the two companies own approximately
180,000 REO properties and approximately one-half of these properties are available for sale at
any point in time. Preparing properties for sale often takes several months for a variety of
reasons, such as the wait period required under state redemption laws during which foreclosed
borrowers may re-claim ownership rights, and time needed to repair damaged or neglected
properties.
The pace of REO sales has improved substantially over the last few months, a trend that suggests
that the excess supplies of these properties should decline in the future. However, the number of
non-performing loans - particularly severely delinquent loans - remains large. Today, the
Enterprises collectively own or guarantee approximately 1.3 million non-performing loans, the
majority of which are more than a year delinquent. A priority for FHF A and both companies is
to avoid foreclosure even in these protracted cases, through short sales, deeds-in-lieu, and deedsfor-lease.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00051

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.002

46
Loss Mitigation and Current Approach to REO Disposition
Fannie Mae and Freddie Mac have been leaders in working to resolve problem loans and address
the ongoing challenges in the market. Collectively, their efforts have made a meaningful impact
on reducing foreclosures. Since conservatorship, the Enterprises have completed 1.1 million
loan modifications, more loan modifications than foreclosures. These modifications plus all
other foreclosure prevention activities, total to some 2.2 million foreclosure prevention actions.
more than twice the number of foreclosures the Enterprises have completed during this same
period.
Not every foreclosure can be prevented, however, and the REOs must be sold in a manner that is
most beneficial for both the Enterprises and the neighborhoods where these properties are
located. Efficiency in the process, with conscientious repair and sales preparation, diligent
management, and aggressive marketing of the propcrties results in the best outcome for all. To
date, both Fannie Mae and Freddie Mac have performed this role well. Both companies rely on
retail sales strategies, where properties are sold one at a time, most often to buyers who plan to
use the properties as their primary residence. In 2011, approximately 65 percent of the
Enterprise REOs were sold to owner-occupants. The majority of these properties were sold
within 60 days, at close to market value.
Further, both companies offer special sales opportunities for nonprofits and local governments to
purchase properties before thcy are marketed to a broader set of investor buyers. The
Enterprises' First Look programs permit properties to be used for mission-oriented community
stabilization programs. During the first 15 days that a property is listed, both companies only
consider offers from those seeking to purchase the home as their primary residence and public
entities. Finally, for properties that do not sell within six months or so and are sufficiently
concentrated in a particular geographic area, Fannie Mae and Freddie Mac engage in small bulk
sales. The propertics sold through these arrangements are usually lower-valued homes and are
purchased by nonprofits, local governments, or regional investors.
Objectives of the REO-to-Rental Initiative
The REO-to-Rental Initiative complements these primary disposition strategies and is intended
to serve as a pilot, providing an opportunity to test another model. The goals of this pilot are
fairly limited, particularly relative to public perception, so it is critically important to review
FHFA's objectives:
1) Gauge investor appetite for a new asset-class - scattercd site single family rental housing
- as measured by the price that investors are willing to pay for a traditionally high-value
commodity that has been hampered by oversupply;
2) Determine whether the disposition of properties in bulk, as opposed to one-by-one,
presents an opportunity for well-capitalized investors to partner with regional and local
property management companies and other community-based organizations to creatc
appropriate economics of scale, yet provides civic-minded approaches that can stabilize
and improve market conditions;

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00052

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.003

47
3) Assess whether the model can be efficiently replicated to make it a worthwhile addition
to the standard retail and small-bulk sales strategies in place at the Enterprises and other
financial institutions with large inventories of properties to sell.
I'd like to also clarify some misconceptions about FHFA's intent and goals with this effort. The
REO Initiative is highly targeted, focused only on markets that provide an opportunity to correct
a fundamental supply-demand imbalance. This type of intervention would be highly
inappropriate on a national scale and the program was never intended to be offered nationally.
The pilot markets are carefully selected, based on obvious market characteristics - an oversupply
of single family homes for sale and a strong demand for rental housing. Further, the pilot will
not result in severely discounted sales. If the response from investors demonstrates that these
properties cannot be sold at prices that are close to what Fannie Mae can get through a retail
execution, the properties will not be sold. While FHFA as conservator must consider the return
to the Enterprise, the agency is also concerned about the negative impact on the communities and
local housing markets from any further depression of home values.
The uncertainty surrounding the outcomes of the pilot also led to the decision to involve only
Fannie Mae properties in the first phase of the Initiative - for several reasons. One, Fannie Mae
has more homes available, in concentration, in the selected markets. Two, given that the
program is simply a pilot, FHF A was careful to consider how resources would be dedicated to
infrastructure and implementation and determined that only one company should expand upon
existing capabilities to test the model. And, three, given the significant legal and operational
challenges associated with bundling a group of properties in any given market, the decision was
made to limit the scope of properties for sale to those from one company.
Similarly, based on the uncertain outcomes, the pool of properties made available for sale in the
first transaction includes a large portion of homes that are already rented. Most of the tenants
living in these homes were in place when the properties were conveyed to Fannie Mae; the
former investor-owners lost the properties through foreclosure. Fannie Mae and FlIFA decided
to assemble pools composed mainly ofrental properties to ensure that large numbers of vacant
properties were not held off-market for the significant period of time required to execute a sale.
The sales timeline is as aggressive as it can be, but must include adequate time for the assembly
of the pools, compilation and publication of property-level information, due diligence by
potential buyers, evaluation of qualified investors' plans, and the ultimate bid auction itself.
Furthermore, offering rental properties for bulk sale actually helps to test one of the key
objectives to determine investor appetite for this asset class.
Another fundamental misunderstanding stems from the desire to address long-standing rental
housing issues with this program. In fact, the REO-to-Rental Initiative was never intended as a
vehicle to increase the national supply of affordable rental housing, nor to improve the rental
housing stock, through energy-efficient or "green" home improvements. Given that the
properties sold under this Initiative are all unique, with various building styles and materials, any
effort to engage in large-scale upgrades would be hampered by the inability to purchase building
products in bulk and to standardize the construction process. Additionally, while the properties
are located in general proximity to one another, the distance to travel for ongoing maintenance
and management will likely be a challenge and add costs for any asset manager. The economics

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00053

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.004

48
of scale that provide an opportunity to reduce costs in multifamily rental housing are likely not
applicable to this type of housing.
I would note that the expansion of rental housing options in the affected communities could have
a beneficial impact on price in the surrounding rental market. These homes also offer better
altcrnatives for larger families than many traditional multifamily rental complexes, with more
bedrooms and outdoor space for recreational activities. And the general home improvement,
whieh may include the installation of insulation or new, more energy efficient appliances, could
ultimately contribute to the overall improvement of the housing stock; it's just not the primary
goal of the program.
Current Status of the REO-to-Rental Initiative

In developing the REO-to-Rental Initiative, FHFA invited several federal agencies with
experience in asset disposition and REO sales to participate in an interagency working group,
reviewing information received by the original request for information issued in August 2011
and evaluating alternative approaches for the pilot. The working group includes the Federal
Deposit Insurance Corporation (FDIC), the Department of Housing and Urban Development, the
Federal Reserve, and the Department of the Treasury, along with Fannie Mae and Freddie Mac.
Thc interagency input has been helpful and FHFA adopted a version of the FDIC approach to
asset disposition for banks as a model for this pilot.
Weare well into the first transaction, announced in February, targeting areas that have been
hardest hit by the housing crisis. Fannie Mae is selling approximately 2,500 properties, divided
into eight sub-pools, located in Las Vegas, Nevada; Phoenix, Arizona; various communities in
Florida; Chicago, Illinois; Riverside and Los Angeles, California; and Atlanta, Georgia. More
detailed information on the number of properties in each location is available on FHFA's web
site http://www.fhfa.govlDefault.aspx?Page=360. Immediately following the aunouncement,
interested investors were asked to prequalify by certifying to their financial capacity, relevant
market experience, and obligation to follow the transaction rules. Those who prequalified were
then eligible to submit an application to participate in the auction. Evaluation of those
applications is now underway.
The application process is comprehensive, rigorous, and demanding, requiring exhaustive
amounts of information and documentation from the applicants and their business partners. Only
those investors who have sufficient capital and operational expertise will make it past the
scrutiny of the reviewers. The financial strength of the investors may depend on partnerships
among several parties. Nonprofit investors may work with and tap into the deeper financial
base of - institutional investors and various types of investors can pool resources to expand
capacity and create better execution. As mentioned previously, the intent of the Initiative is to
test whether or not private capital can and will come into this new asset class, providing muchneeded financial support to some of the hardest-hit housing markets.
Just as important, only those investors with deep operational expertise in both asset management
and property management will make the cut. The application requires that the investors describe

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00054

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.005

49
their previous experience managing these types of assets, from marketing to leasing to
maintenance. How relevant, extensive, and recent that experience was will matter in the scoring.
In addition, the applicants were expected to detail their plans for operating a first-rate rental
program with these particular properties. They were required to explain how they will rely on
local and regional organizations to tailor their programs to meet the needs of these residents in
these communities. Investors had to describe what resources they will call upon to ensure that
properties are repaired, leased quickly, and well-maintained, and to guarantee that the residents
receive the services they need. There is an expectation that local construction and repair
companies will be engaged due to their familiarity with state and local building codes, that local
property management firms will have knowledge of the potential tenant population in the area
and the best means of marketing to these citizens, and that community-based nonprofits may
provide supportive services to the residents. The program even requires that the new owners pay
for tenants to receive credit counseling at their request from a HUD-approved housing
counseling agency in order to help repair their credit and get them on more stable footing.
This rigorous application process is intended to narrow the pool of eligible bidders to those who
have financial and operational expertise, but also the mission-oriented commitment to ensure that
this program brings capital to markets in need in a way that stabilizes communities.
Currently the independent third party hired to review the applications is in the process of doing
so and this process will be completed in next few weeks. After that, eligible bidders will be
notified and the bid process will begin. FHF A's goal is to complete this first pilot transaction in
the next few months.
Conclusion
To reiterate, the REO-to-Rental Initiative is a pilot, a test, to see whether another disposition
strategy can complement existing sales efforts, generating private investment in single family
rental housing in a way that is both efficient and effective at stabilizing local markets.
The pilot relies on Fannie Mae for execution, but frankly, the Enterprise portion of the REO
market is limited, so the future benefit of the program may be more applicable to private
financial institutions that choose to sell their inventory in this manner. Further, as mentioned
previously, both companies will continue to rely on their existing retail sales strategies as the
primary vehicle for selling homes. Retail sales move properties quickly, most often to families
who plan to reside in the homes, and at prices that are close to market value. As part of the
broader REO efforts underway, FHFA is working with both companies to enhance these retail
sales approaches, improving and expanding specialized financing programs available for both
homebuyers and small investors.
I thank you for the opportunity to testify today and look forward to your questions.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00055

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.006

50

11
St.'an Dobson !

May 7,2012

Amherst' Holdings LLC

scobsonC~amhcrst.com

/ 512.342.3030

Testimony of Sean Dobson, CEO, Amherst Securities Group

before the
Subcommittee on Capital Markets and Government Sponsored Enterprises
of the
House of Representatives Committee on Financial Services
"An Examination of the Federal Housing Finance Agency's Real Estate Owned (REO)
Pilot Program"
Me. Chairman and Members of the Subcommittee, thank you for your invitation to testify today, My
name is Sean Dobson, and I am the CEO of Amherst Holdings, Amherst Holdings consists of several
enterprises all of which support single family housing finance in one way or another, Amherst Securities
Group LP is a leading broker/dealer specializing in the trading of residential and commercial mortgagebacked securities; Amherst Advisory is an advisory and asset management platform managing funds
invested in mortgages and Main Street Renewal is an entity we established to invest in single family
rental properties, Across these platforms, Amherst tracks the housing and mortgage markets at the
asset level, This includes monitoring monthly performance on over 40 million active mortgages and real
estate transactions on over 80% of the taxable parcels in the United States,
My partners and I have been a part of the housing finance infrastructure of the U,S, for over 25 years, I
want to point out that although we are a dedicated real estate finance platform, Amherst demurred on
the opportunity to originate and underwrite of subprime, "alt,a", pay option mortgages and their highlyleveraged and over rated RMBS and CDO progeny that created the financial crises we are still living
through today,
I am here to discuss our view of the U,S, housing markets and how we view the costs and benefits of
properly monaged bulk sale transactions, Since this topic can get pretty dry, I'll jump right to the
bottom line, Last year over I million homes were lost to foreclosure; these homes were liquidated
through a legacy process targeted to owner occupant buyers, Unfortunately, the bursting of the
housing bubble and subsequent retraction of credit availability left very few qualified prospective
owner occupant buyers, As is to be expected, these conditions mean that the majority of foreclosed
homes are already being sold to investors r, The current process has forced prices to generational lows
and has housing caught in a reflexive downward spiral, Lower home prices are causing more
mortgage defaults, which cause more distressed sales, which in turn lower prices, starting the cycle over
again, Although recent headlines have been less negative, we should all be concerned about the 6-9
mi!lion unit backlog of unresolved and impaired mortgages, A disorderly liquidation of the distressed
REO inventory will further undermine consumer confidence and presents a threat to the nascent
recovery in the overall economy,

Please see Exhibit 1

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00056

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.007

7801 North erri'al o[Tex,,, Hwy Austin, TX 78731 (512) oi2,3000 (SOOl 396-3311 (512) 342-3097 fax

51
. , Amherse Holdings LLC
We believe that a well designed bulk sales program will have little upfront costs and can diffuse much
of these macro risks while also alleviating the burden that abandoned and non-performing REO is
having on communities and existing home owners currently making their mortgage payments. I would
like to start to talk about these benefits from the ground up and then estimate the upfront costs.
Current occupants can be saved - As you likely know. the GSEs currently own thousands of homes that
are "tenant occupied." In these cases, a borrower defaulted on a mortgage after leasing the property
to a family. If these homes are liquidated via the current process, (one at a time), the leases will not be
renewed, the families will be asked to move and the home will be sold, primarily to investors, The FNMA
pilot programs for bulk sales are these tenant occupied homes. If a long term investor purchases these
homes through a bulk sale, many of the tenants will be able to stay in place, By simply short circuiting
the process we accomplish simple things -- children stay in their schools, neighborhoods are maintained
and lives are not disrupted. At Amherst, we purchased the only auction of these types of homes ever
conducted by Fannie Mae. We were able to maintain one-half of the occupants in their residence. If a
successful market for occupied homes is established, this type of benefit could also accrue to owner
occupants nearing foreclosure. Servicers should be financially incented to keep the home occupied
and cash flowing as they would recover a higher price upon sale of the property.
Renfalinflafion can be minimized - Another first order benefit of a bulk disposition program is the
increase in the speed at which housing is released back into the markel. Due to the tightness of
mortgage credit and the large number of families being displaced by foreclosures, apartment
vacancies are falling and rents are rising sharply. Even with the anemic recovery in jobs, rents are rising
and vacancies are below pre-crises levels'. The current drawn out foreclosure process is keeping
millions of housing units off the market. and is causing renting families to suffer rent inflation. It is also
worth noting that this uptick in rental performance has increased multi-family unit construction, which is
resulting in the banking system and the GSEs increasing their exposure to this asset class while millions of
single-family housing units sit in disrepair awaiting a resolution. This is potentially a misallocation of
capital that could haunt us later.
Home prices can be increased - Beyond these first order benefits we think a series of bulk sales will have
a direct and positive impact on home prices. Currently, the investor base purchasing homes is highly
fragmented and, as a consequence, experiences a high cost of capital relative to the overall markel.
While these investors should be commended for responding to the crisis by deploying private sector
capital and resources to this sector, they have not been able to move home prices upward even as
housing prices are at a generational low relative to affordability or rental value. As a comparison, the
median apartment in the U.S. that rents for $ J ,200 per month has a market value of $ J 62,000 while a
home that rents for the same amount sells for closer to $ J20,000, a 35% discount. In a healthy housing
market, that price relationship is usually reversed. The causes for the discount are several, but our belief
is that the primary villain is the lack of an efficient capital transfer mechanism for the asset. In other
words, investment housing is a cottage industry and has very little access to equity or debt capital.

Single family property investors are generally very small operations and only own around three homes.
The largest platforms we have encountered only own J ,000 units or so. This, of course, limits operational
efficiency and increases the all-in cost of capital for single family investors. In contrast. the top ten
public apartment REITS own, on average, 55,000 units. Therefore, the key to decreasing capital cost and
thereby increasing home prices back towards some semblance of fair value is standardizing the single
family leasing industry and creating a smooth capital transfer mechanism.

Please see Exhibit 2

May?,2012

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00057

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.008

52
. , Amherse Holdings LLC
We have been investing in homes with this in mind for over two years, and believe, without question,
operating in scale can be done safely. The largest hurdle to achieve this scale is the acquisition process.
Foreclosure auctions are open outcry for single transactions and the realtor - servicer process is simply
too clumsy. This asset class needs to attract hundreds of billions of dollars; there simply is not enough
time for investors to negotiate hundreds of thousands of purchases one at a time.
The concept of housing as a threat to the economy can be arrested - The depths of the mortgage
problems can be measured in several ways. The nation's REO inventory sits at around 400,000 units, yet
this is but the tip of the proverbial iceberg'- Our data shows over 3.3 million mortgages, with underlying
real estate valued around $430 billion, have not received a payment in over twelve consecutive
months. Behind that mountain of real estate lies another 6+ million units that are either delinquent or are
so deeply credit impaired that they are hanging by a thread. When you contrast these horrific numbers
to the 85,000 units of REO being sold each quarter for approximately $11 billion dollars, I hope you see
why we are concerned. Either the pace of liquidation has to increase, which under the current model
could drive home prices even lower, or this back log will stand as a threat to the economy for at least
another four years.

Because of the Fannie Mae pilot programs, we and others have embarked on building the appropriate
platforms to shepherd the necessary capital to the market. This is a meaningful event because a simple
way for equity capital to find its way to housing does not exist currently. The wark we and others are
doing could very well change the conversation around housing and create a back stop for home
prices. With large credible buyers entering the market. the fear of the supply/demand imbalance
should abate. Institutional investors creating a "credible threat" of higher home prices could serve to
move potential home buyers off the side lines.
As it sits today, with a negative national dialogue around housing, there is little impetus for buyers to act.
We believe that home building, real estate transactions, property improvement investment and all of
the industries associated with housing are paused, waiting for a signal that a disorderly liquidation of the
foreclosure backlog will not destroy asset values. The nation needs to build sustainable demand in a
large and credible way. Without a reasonable expectation of a streamlined acquisition process,
investors, like us, will not take the risk in building out this large national infrastructure and the benefit of a
"credible threat" would not be realized by the housing markets. It is worth adding that without this
infrastructure to pass capital trom the markets to housing, the Federal Reserve's dramatic monetary
policy efforts are pretty much in vain. It does not matter how low bond rates go or how many
mortgages the Federal Reserve buys, the credit and capital transmission system will remain broken, or
non-existent. unless it is repaired.
It is worth noting that converting a large portion of the distressed inventory to performing assets is a
natural stimulant to the local and national economies. Property repair and renovation is done with
local labor, occupant services are managed by local companies. Property owners are incentivized to
keep the home in desirable condition to compete in the rental markets. As these investments are
made, and neighborhoods are repopulated, confidence builds. This will likely attract more capital and
lift asset prices. Kicking off this type of a virtuous cycle is what the housing market needs,

By now you must be saying, that bulk sales are the gift we've been waiting for.
Less trauma to current occupant families
More affordable housing supply

Please see Exhibit 3

May 7, 2012

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00058

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.009

1.
2.

53
. , Amherst' Holdings LLC
3.

Higher home prices

4.

A reduction of REO and non-performing loons

But. there must be a catch. How much will it cost the taxpayer?
It may not cosl anything - There is significant discussion about the level of price discount required to
attract bulk buyers. We have heard discussions indicating that the current process achieves a sale
price of around 94% of "value" and a bulk investor might not pay as much. We think the idea of single
asset sales as the best execution is sound in that it tries to find on owner occupant buyer who by
definition should pay the highest price for the home. The problem is that this is working. at best. half the
time. Additionally. the process can get caught in a logic loop. For example. let's say you were an REO
seller and wonted to price your inventory relalive to recent sales. If you looked at last month's
transactions and decided your home should sell for $100.000 you might be happy to toke $94.000 as it is
a very small discount. Of course, you are not the only REO seller and when you repeat the process next
month you see that everyone also sold for $94.000. This month when you compare comps. naturally you
get $94,000 as fair value. If you then sell for a 6% discount. you get $88,000. You still only took a 6%
discount, but at this pace home prices are seemingly falling at a 70% per annum rate! It is this process
that has allowed home prices to fall to generational lows.

Another important set of facts to understand are the costs associated with a single asset sales process.
The table below is our estimate of the direct expenses related to a single asset transaction.
Commissions, repair costs, taxes and insurance can easily run 20% of asset price. These direct expenses
do not begin to account for the comprehensive platforms the GSEs have been required to establish to
manage the home from the point of foreclosure, through the rehabilitation process and on to the sales
transaction. This management infrastructure is necessarily substantial. Therefore, a sale taking place at
an earlier phose of the process can achieve a lower gross price of 20%-30% and can create on equal or
higher net price for the REO seller.

Home Value .., ...... ,." ..............." ....., ................. $ 150,000

Sales Price ,..............................., .......................

141,000

Comission ........... $ (8,460)

94% of Value

6% of Sales Price
2.5% of Sales Price

$ (3,525)
Repairs ............... $ (7,000)
Propert Taxes ..... $ (1,500)
Insurance ............ $ (1,350)

Closing Costs ......

Average
6 months @ 2% per annum
5 months@90bps per annum

$ (21,835)
$ 119,165

Costs
Net Proceeds

Gross Recovery as % of "Value"

79.4% Pre-administrative overheads

Over time. we do not believe that a bulk discount will prevail. After the first $10-$20 billion in sales, we
believe capital will become more available and prices will rise. Even if the net proceeds from the first
$20 billion were 5% less than single asset sales, they could drive the price of the next $400 billion in sales

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00059

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.010

May 7, 2012

54
. , Amherst" Holdings LLC
much higher. While there may be some small costs to priming the pump, we believe these cosls are
minimal when compared to the larger picture.
I want 10 be clear that given the current investor base, the GSEs are finding the best execution. The
idea of bulk selling is meant to bring a new buyer to the market; one with a long investment horizon,
properly priced capital and a reduced friction operaling platform with scale pricing. The potential for
bulk sales motivates these investors to get organized and allows monetary policy to actually reach the
target assets.
No matter what your position is in this debate, it is hard to argue that the status quo is acceptable. The
backlog of unresolved defaulted mortgages hangs as a pall over the U.S. economy. The lack of credit,
lack of confidence and the continual threat of a tsunami of distressed sales have conspired to
undermine housing and prevent the sectors normal contribution to overall economic activity and job
growth.
Thank you for the opportunity to testify. I look forward to any follow up you may have.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00060

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.011

May 7, 2012

55

III
Exhibit

1:

Amherst" Holdings LLC

The Majority of f'oreelosed Homes are Already Being Sold to Investors

600%

50

+--- ----------------------- % Diff NAR 8dstmg Sales to

loan Purchase Activity

.0%

~ 40,0%

Purchase Activity)

is
1:1' 30,0%

~ 20.0%

~
~

+ - - - - - - - - - - - - - - -1\---t-_1i!~-+I______I-+_

10,0%

0.0% H+-Y-b-~rkr+-~f_t+___1it_+i----~~------

*-10.0%

-30.0% " - - - - - - - - - - - - - - - - - - - - - - ------

-Existing Home Sales {NSA) from NAR,

Annualized
'~-,AmherstE$timate

of Purchase toan Activity,

Annualized

--- -------------------- - -------- -----

Source: CoreLogic, 1010Doto, Amherst Securities as oj Feb 2012

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00061

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.012

VerDate Nov 24 2008

May 7, 2012

56
. , Amherse Holdings LLC
Exhibit 2: Even with Anemic Recovery in Jobs, Rents are Rising and Vacancies
are Below Pre-Crisis Levels
MultiFamily YaY Rent Growth

Year/Q""'ler

MultiFamily Vacancy Rate (%)

Non-Farm Pavroll
140,000
138,000

136,000
134,000
132,000
130,000

128.000
126,000

124,000

Source: US Census, PPR, Amherst Securities

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00062

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.013

May 7, 2012

57
. , Amherst" Holdings LLC
Exhibit 3: The Depths ofthe Mortgage Problem

Q12oo9 Q22009 Q3 2009 042009 Q12010 Q22010 Q32010 Q4 2010 Q12011 022011 Q3 2-011 042011
_>.12MDQ&'CL

Despite liquidations averaging 901:. per month, since January 2009 the balance of the Shadow Inventory (loans greater than 12 months DO, loans in
forectosure and REO properties) has increased by an average of 60k each month
These figures DO NOT include any contribution from borrowers less than 12 months DO, who have a very substantial chance of entering the Shadow
!nventory over the next year, or re-performing borrowers, who have a reasonable chance of becoming delinquent again over the near term
Current Overhang'" (Shadow Inventory Outstanding + REO Out~tanding) divided by Average loans Sold Per Month
Source: CoreLo91c Prime Servicing Databose, CoreLogic Securitized Loon Database, FDIC, Fannie Mae, Freddie Mac, FHA, lD10Data, Amherst Securities

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00063

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.014

May 7, 2012

58

i~U~E
i nterprlse@
Testimony of Rob Grossinger
Vice President, Community Revitalization
Enterprise Community Partners, Inc.

May 7,2012

Good afternoon. Thank you for inviting me to testify today. My name is Rob Grossinger, Viee
President for Community Revitalization at Enterprise Community Partners, Inc. Enterprise is a
family of companies working together to build opportunity in communities across the country.
Opportunity begins when people have a safe, healthy and affordable place to call home in
communities with access to good jobs, excellent schools, efficient transportation and healthy
living environments. For 30 years, Enterprise has introduced solutions through public-private
partnerships with business, philanthropy, community development corporations, advocates and
social entrepreneurs that share our vision that one day, every person will have an affordable
home in a vibrant community, filled with promise and the opportunity for a good life. Since
1982, Enterprise has raised and invested more than $11 billion in equity, grants and loans to help
build or preserve nearly 300,000 affordable rental and for-sale homes to create vibrant
communities and more than 410,000 jobs nationwide.

Given the chance, people will climb the ladder of opportunity. But for so many of us, the middle
rungs of the ladder have been broken, with individuals and families sliding all the way to the
bottom. This has been especially true over the past several years as the economic and foreclosure
crises have devastated families and neighborhoods across the country. Communities that are
traditionally underserved by mainstream mortgage lenders have been even more severely
impacted by the concentration and volume offoreclosures and vacant real-estate owned (REO)
properties. Consequently, they will take longer to recover. Enterprise is dedicated to helping
these families and communities by providing comprehensive neighborhood stabilization

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00064

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.015

59
strategies and advancing policies to achieve this goaL Though the foreclosure crisis is relatively
recent, vacant and abandoned homes are not. For decades, Enterprise has worked nationally to
promote neighborhood stabilization policies and help communities at the local level cope with
the destabilizing impact of vacant and abandoned houses.

REO-to-rental fits squarely into our broader neighborhood stabilization agenda and mission. In
my testimony today, I will focus on different approaches and a range of tools available to
stabilize neighborhoods. By keeping whole communities in mind, as opposed to more siloed
approaches, we can ensure that the right solutions are available and tailored to both impacted
individuals and the wide-ranging needs of diverse communities. Therefore, our primary policy
recommendations are:
1. Attempt to keepfamilies in their homes. Avoiding vacancy is the best neighborhood
stabilization strategy. We recommend that a wide range of tools be available,
including principal reduction and other sustainable mortgage modification programs
for at-risk homeowners. As I will discuss later in my testimony, Enterprise has
partnered with three other national not-for-profits and the Illinois Housing
Development Authority to develop the Mortgage Resolution Fund. The goal of the
Fund is to purchase delinquent mortgage notes using a portion of Illinois's Hardest
Hit Funds with the intention of dramatically modifying the note terms and principal
balance to keep the existing homeowners in their homes.

2. Return vacant properties to productive use as quickly as possible and expand the
supply of affordable rental housing. Vacant and poorly maintained buildings invite
blight and crime, drive down neighborhood property values and counteract attempts
to stabilize neighborhoods. In addition, demand for affordable rental housing has
grown, putting pressure on the neediest familics. We recommend that the federal
government encourage responsible public and private efforts to acquire and
rehabilitate vacant and foreclosed homes so that they can provide affordable rental
opportunities to low- and moderate-income families.

3. Ensure that affordable homeownership remains available for low- and moderateincome families. We know that low- and moderate-income households, given

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00065

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.016

60
responsible financial products, can remain homeowners even in times of stress. We
recommend that the federal government continue to promote policies that provide
fairly-priced, responsible and sustainable mortgage access to credit-worthy
borrowers.

4. Target stabilization efforts. In this world oflimited resources, we must target our
efforts to ensure that we can make a real difference in any given neighborhood. We
recommend that federal efforts be coordinated and build upon existing stabilization
strategies. We encourage banks to develop robust, well-integrated anti-blight
strategies for their own portfolios.

Enterprise was among the first to recognize the importance of proper REO disposition in order to
facilitate neighborhood stabilization. We testified at one of the first Congressional hearings
before the Senate Banking Committee on January 31, 2008 and urged Congress to implement
comprehensive foreclosure stabilization policies. We formed the Save America's Neighborhood
Campaign, a broad-based coalition of 39 national and local organizations concerned about the
foreclosure crisis' impacts on communities, including real estate developers, Realtors, housing
advocates, civil rights groups and state and local governments. This coalition championed the
passage of the Neighborhood Stabilization Program (NSP), and we have continued to work with
our partners on the ground to both implement and leverage NSP to ensure maximum impact. We
are grateful to Representative Maxine Waters for her leadership in ensuring that homeowners
and communities were not forgotten in the midst of the financial crisis. Because we know how
important NSP has been in communities around the country, we are strong supporters ofH.R.
3502, the Project Rebuild Act of2011.

In addition, we were one of the six founding members of the National Community Stabilization
Trust (NCST) an entity created in 2009 to facilitate government agency and non-profit efforts to
revitalize distressed neighborhoods by providing efficient, streamlined access to vacant and
abandoned properties from financial institutions. As founding members, Enterprise, the Housing
Partnership Network (HPN), Local Initiatives Support Corporation, National Council of La Raza,
National Urban League and NeighborWorks America are currently working with NCST to

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00066

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.017

61
provide local private and public entities with innovative programs and services that facilitate the
acquisition and productive reuse of foreclosed and vacant properties. NCST works with over 300
local housing providers in 46 states and has transferred over 6,700 properties from bank REO
status to ownership by community developers. NCST maintains a working partnership with the
Department of Housing and Urban Development to administer the National First Look Program,
a property transfer platform that connects NSP-funded housing providers with the REO
inventories of the nation's largest servicers, Federal Housing Administration (FHA), Freddie
Mac and Fannie Mac in a program that permits the streamlined acquisition of distressed
properties in neighborhoods disproportionately impacted by foreclosures and abandoned
housing.

At Enterprise, we continue to work with our partners to develop the national tools and local
capacity to implement holistic neighborhood stabilization in the wake ofthe foreclosure crisis.
We help homeowners, renters and communities at all points in the foreclosure timcline. The
foreclosure process is a continuum that begins with an already distressed or soon-to-be-distressed
homeowner and, without intervention, typically ends with a vacant, foreclosed home. Enterprise,
in conjunction with our partners, seeks to find the various intervention points where we can
influence the outcome so that it is better for the homeowner and the community. For example, to
help families still in their homes, we co-founded the Mortgage Resolution Fund, discussed in
more detail below, to purchase delinquent loans for the purposes of principal reduction. But
recognizing that not all foreclosures are preventable, we are also working with partners,
including for-profit equity funds, to facilitate responsible REO-to-rental programs so that we can
help stabilize neighborhoods by reducing the inventory of vacant, unsold homes and creating
affordable rental stock. Both solutions are a marked improvement for both the neighbors of
foreclosed homes and the new families living in the homes.

REO-to-Rental

REO-to-rental is an important intervention at the end of the foreclosure process. It helps stabilize
neighborhoods because it returns vacant, foreclosed homes to productive use by filling them with

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00067

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.018

62
renting families. It also can expand the supply of affordable rental homes, which is critical in this
country where more than 26 percent of rcnters pay more than half of their income for rcnt. 1

With the already significant number of vacant, dilapidated homes destabilizing many
neighborhoods, demolition may be the best option, and for that rcason we support H.R. 4210, the
Restore our Neighborhoods Act 0[2012. This bill would provide additional resources to states
and localities seeking to eliminate blighted properties. As we seek solutions to the foreclosure
crisis, we must choose thc REO disposition method that best reflects the needs of each individual
propcrty and community.

Howevcr, many properties can and should be occupied again by homeowners and renters. Dne
to the significant stock of foreclosed, vacant homes coupled with the tightened mortgage credit
market, we have begun to work with the public and private sector to convert many ofthesc
foreclosed homes into rentals because it can stabilizc neighborhoods, expand the supply of
affordable rcntal properties and ultimately make good financial sense for banks and servicers.
Filling these homes with renters is a viable solntion to hclp stabilize neighborhoods because it
reduces vacancies and keeps homes off the over-saturated for-sale market during this volatile
time.

At the end of 20 11, there was an anticipation of large bulk sales from FHA and FHF A. This has
prompted a lot of interest from private capital that views REO-to-rental as a good busincss
opportunity. Though it is currently unclear just how large those governmcnt bulk dispositions
will be, this is a good opportunity for the government to set standards for the sale, disposition
and management of REO homes. Such standards would allow private capital to flow in such a
manner so as to help address this problem, as opposed to exacerbating it, while ensuring that this
new REO-to-rcntal initiative benefits all communities, including low- and moderate-income
communities.

Statistic from 2001-2009. Joint Center for Housing Studies of Harvard University. "The State of the Nation's
Housing 2011." Available at http://www.jchs.harvard.eduJresearchipubJicationsistate-nalion%E2%80%99shousin-2011
1

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00068

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.019

63
Enterprise is in favor of public and private efforts to convert foreclosed properties into rental and
commends the FHA and FHF A's ongoing efforts to address the significant REO inventory held
by government entities. However, we arc concerned that the FHFA pilot announced by Fannie
Mae earlier this year does not include certain elements to ensure that the REO disposition
process helps, rather than hurts, ongoing efforts to reduce vacancy and revive the hardest hit
housing markets. We urge FHFA and FHA to make sure this pilot complements, rather than
complicates or undermines, those actions by encouraging partnerships between for-profit and
non-profit entities. A monitoring component on each sale is necessary to ensure that purchasers
coordinate their activity with local and federal revitalization activities. Such a monitoring
component would help to ensure that the purchaser accomplishes its stated intentions (including
quality property management) and does not 'walk-away" from problems that develop as a result
of market miscalculations or unintended outcomes resulting from bulk purchases. This would
also require communication with local authorities from both the REO purchaser and the FHF A
agency and would ensure that private sector actors are properly monitored and vetted so as to
avoid poor property management.

We at Enterprise have entered this REO-to-rental market looking for gaps in the private market
that can be filled with community stabilization as the primary goal. Thirty years of experience
have taught us that private capital will not be attracted to all neighborhoods and that certain lowincome or minority neighborhoods may be left out of this new stabilization trend. Therefore,
Enterprise has entered into a partnership with a for-profit equity fund to develop programs in
neighborhoods that private equity would not reach without partnering with not-for-profits with
on-the-ground expertise. Such a real partnership of private equity capital coupled with
Enterprise's neighborhood-based expertise is exciting because it can be a model to scale up and
stabilize our target neighborhoods. This experience also informs our policy position because we
believe that neighborhoods will be served best if there are partnerships between private equity
capital and local non-profit expertise. Therefore, we urge the FHFA and FHA to include
incentives in its bidding and financing processes that encourage partnerships that will maximize
the affordability and proper maintenance of the properties.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00069

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.020

64
Mortgage Resolution Fund
Though we certainly support REO-to-rental strategies for foreclosed homes, we prefer to avoid
REO all together. Instead, we believe that it is best for homeowners and communities if we can
intervene further up the foreclosure process and keep people in their homes. Therefore. I'd like
to focus for the moment on a pilot program we are running in Illinois that seeks to acquire and
modify delinquent mortgages of homeowners in targeted low- and moderate-income
neighborhoods. This is a very real example of what can be done today to help these homeowners
and communities. I will be happy to report back to Congress on the outcomes of this pilot later
this year.

Enterprise, I-lousing Partnership Network, Mercy Housing and NCST together formcd the
Mortgage Rcsolution Fund (MRF). The mission ofMRF is to create stable options for
homeowners for whom homeownership is still financially viable and to provide rental options jor
homeowners whose loans cannot be modified. MRF is designed to purchase distressed mortgage
notes from financial institutions and other servicers/investors with the explicit intent of reducing
the mortgage principal and modifying the note to keep the homeowner in their home whenever
possible. MRF's note acquisition pricing model is consistent with the market price established in
the current distressed mortgage note sales market.

In Illinois, MRF bcgan working with the Illinois Housing Development Authority (IHDA) to
implement MRF using the state's allocation offederal Hardest Hit Funds. In partnership with
IHDA, targeted zip codes in the greater Chicago land area were selected based on the filters
disclL<;sed below. We worked continuously with IHDA over a nine month period to design the
program, and it was then approved by the Treasury Department. The mission ofMRF is to use
the states' Hardest Hit Funds allocated by the U.S. Treasury to state housing finance agcncies to
achieve socially responsible principal rcduction solutions for borrowers. Moreover, the notes are
being purchased in geographically targeted hard-hit markets, using local community nonprofit
organizations to directly assist the delinquent borrowers in getting back on track with payments.
The state of Illinois has led the way by committing $100 million in Hardest Hit Funds to MRF,

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00070

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.021

65
which has provided an example to other state HFAs to begin working with MRF to implement
this program in their states.

Specifically, MRF is acquiring the delinquent note at the current market price for nonperforming
note sales, reducing principal to between 85-90 percent of the current home value, and providing
credit counseling to help the homeowner so they can meet the new payment amount and reduce
all of their monthly debt to 45 percent of their total income. We do significant due diligence
before we decide which notes to purchase. We target homeowners who are still living in their
homes, earning documentable income and want to remain in their homes. Also, we provide
comprehensive credit counseling so that our participating families can develop an individualized
budget so they can assume the new mortgage payments in a long term, sustainable way.

Geographic targeting is important to MRF. We are targeting harder-hit neighborhoods,

concentrating on communities that are recipients ofNSP funds. MRF uses two filters to arrive at
its optimal geographic target areas. The first filter defines the core geography for the program in
a given market:
The census tract must score between 12 and 19 out of 20 on the NSP2 needs scale
developed by HUD.
Eligible census tracts must show a U.S. Postal Service vacancy rate of 10 percent or
less.
Eligible census tracts must have an Average Median Income (AMI) of 120 percent of
household income or below.

The second filter defines local market viability by analyzing sales data, such as average sales
prices and foreclosure sales prices. This filter forms the basis for determining whether there is
market viability in a particular zip code.

MRF expects to be able to modify 60 percent of the notes purchased, a much higher success rate
than private equity funds

the private firms we interviewed before the formation ofMRF keep

only 20-25 percent of homeowners in their homes on average. We anticipate that we can modify

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00071

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.022

66
this larger-than usual percentage ofloans because of the ability to be selective in our purchases
and the intensive debt management services provided by our program. MRF conducts
comprehensive financial education that focuses on reducing all of the homeowner's debt to
ensure that the new loan payments are affordable and sustainable. Our mortgage resolution
specialists also work with the 40 percent of homeowners who cannot or choose not to remain in
their homes for up to six months to educate them about their options, including short sales, or
deed-in-lieu of foreclosure. Foreclosure is the absolute last resort and in all cases, we provide
relocation expenses to the owners and do our best to ensure a transition to other affordable
housing.

MRF is ultimately the best outcome for struggling homeowners because we will reduce principal
below market value in order to restore some of the lost equity to the homeowner, which is
achieved through a soft-second mortgage with anti-flipping provisions. It also achieves
permanent long-term affordability for the homeowner and stability for the neighborhood. MRF is
managed by four high-capacity non-profits who have been working in communities for decades
and are community development experts. Therefore, as we scale up MRF and demonstrate that
principal reduction is a sustainable modification solution for struggling homeowners, we will
share these lessons more broadly so that they can inform the national debate on principal
reduction.

Access to Mortgage Credit

Ultimately, the foreclosure system only works if there is mortgage credit available for
homebuyers and investors to purchase properties. Vibrant communities need new homebuyers to
help communities grow and stabilize prices. As we are dealing with the foreclosure crisis, we are
also working through myriad issues related to the availability of mortgage capital. Currently, we
are seeing a dramatic tightening of lending standards in the neighborhoods that have been hardest
hit by the foreclosure crisis, many ofwhieh are minority and low-income. Creditworthy
borrowers are often unable to access mortgage capital in these neighborhoods. This translates
into a much longer period of time for these neighborhoods to stabilize due to the inability, but
not unwillingness, of buyers to purchase properties.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00072

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.023

67
We believe it is critical to ensure there are responsible, mainstream lending products. However,
we arc concerned about the potential impact of overly strict lending and downpayment standards
on future mortgages and borrowers. The Consumer Financial Protection Bureau is currently
working on final rules for Qualified Mortgages (QMs) and Qualified Residential Mortgages
(QRMs). Both rules have the potential to set up new balTiers to homeownership that could
effectively lock out low-income, moderate-income and first-time homebuyers. For example, a
strict 20 percent down payment requirement would be devastating in low-income neighborhoods
because it will take years for the average family to save such an amount, even if that tamily has
good credit and would otherwise be able to responsibly support mortgage payments. In 30 years,
we have seen that loan characteristics, proper underwriting and homebuyer counseling are more
important predictions of loan performance than the size of the down payment We recommend
that the regulators focus on these characteristics as a way to determine QRMs, not down payment
size. Let's not let the pendulum swing too far the other way, shutting out otherwise qualified
bOlTowers.

Conclusion
Enterprise will continue to look for ways to help families and communities recover from this
devastating foreclosure crisis. We will need many tools to address this problem, including MRF,
for-profit and nonprofit partnerships for REO-to-rental and responsibly provided mortgage credit
to the hard hit communities. Neither the housing market nor the broader U.S. economy can fully
recover without addressing this debilitating foreclosure crisis. We look forward to continuing to
work with you to address this problem. Thank you.

Enterprise is a leading provider oflhe development capital and expertise it takes to create decent, affordable homes
and rebuild communities. For 30 years, Enterprise has introduced neighborhood solutions through public-private

partnerships with financial

institutions~

governments, community organizations and others that share our vision.

Enterprise has raised and invested more than $11 billion in equity, grants and loans to help build or preserve nearly
300,000 affordable rental and for-sale homes to create vital communities. Visit www.EnterpriseCommunity.org and
www.EntemriseCommunity.com to learn more about Enterprise's efforts to build communities and opportunity.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00073

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.024

10

68

A.

401 N. Michigan Avenue

ILLINOIS HOUSING

Suite 700
Chicaqo IL 60611

DEVELOPMENT AUTHORITY

31.2.836.5200

312.836.5222 TOO
www.lhda.orq
Pat Quinn. Governor

Testimony of Mary R. Kenney, Illinois Housing Development Authority (IHDA)

Executive Director
May 7,2012 - Subcommittee on Capital Markets and Government Sponsored
Enterprises
Thank you, Chairman Garrett, Ranking Member Waters and members of the
subcommittee. My name is Mary Kenney and I am the Executive Director of the Illinois
Housing Development Authority (IHDA).

I want to start today by giving you a brief background on my agency and the work that
we do, and talk a bit about what we are doing specific to the foreclosure crisis. Like
most HFAs, IHDA started out as a bonding authority. It was created in 1967 with a very
clear and concise mission: to create and preserve affordable housing in communities
across Illinois. In its infancy, IHDA had just a dozen employees and very few assets.
Today, IHDA has more than 260 employees and more than $2.5 billion dollars in assets.

Since 1967, IHDA has financed more than 200,000 units of affordable rental housing,
comprising nearly 1,800 developments in every county in the State. A recent review of
the State's rental inventory revealed that IHDA is currently responsible for more than 7
percent of the rental stock in Illinois: that's one in 14 apartments. We do this in
partnership with the private sector, acting as a lender, selling tax-exempt bonds and
other mortgage backed securities in the capital markets to finance mortgages made to
private developers. We also

in effect - function as the State's housing department,

administering the federal low-income housing tax credit program, as well as 20 other

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00074

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.025

state and federal housing programs.

69
Testimony of Mary R. Kenney
Subcommittee on Capital Markets and Govemment Sponsored Enterprises Field Hearing
May 7, 2012

In addition to its multifamily business, IHDA operates an affordable homeownership

lending program. This program struggled in recent years. As the mortgage market
accelerated and exotic loan products became the norm, our program - which offers a
fixed rate, 30-year mortgage - could not compete. Despite pressure from Wall Street to
change our lending practices in order to boost originations, we held firm to our model
convinced that our clientele, which are first time homebuyers, was best served by a
standard fixed rate mortgage. As a result, we could not compete with the private market
that was providing low payment loans with to borrowers with little or no credit. In 2006,
the program was all but shut down. Today, the program is again thriving providing
needed liquidity to a market that sorely needs it. Originations have gone from a mere
$40M in 2010 to an expected to $250 million this year.

ILLINOIS' LEADERSHIP IN RESPONDING TO THE FORECLOSURE CRISIS

For the last several years, our work - as yours - has taken place against the backdrop
of the foreclosure crisis that has shaken the housing industry to its core. The crisis is
particularly acute in Illinois.

The Chicago area has the nation's largest inventory of foreclosed homes. In
Illinois, over 103,000 homes received a foreclosure filing in 2011, or one in every
51 homes - ranking Illinois eighth in the nation. 1

As of December 2011, there were approximately 97,000 properties bank owned

or in some stage of foreclosure in the Chicago metro area. 2

Nationally, Core Logic found that the home price index fell by 4.7 percent in
2011. Illinois saw the greatest decline in property values last year, where
prices fell by 11.3 percent. 3

I RealtyTrac
'Ibid
, CoreLogic

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00075

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.026

70
Testimony of Mary R. Kenney
Subcommittee on Capital Markets and Government Sponsored Enterprises Field Hearing
May 7, 2012

With foreclosures and vacant properties at record levels in our state, my agency has
focused its full attention on how to help homeowners and communities within our state,
launching:
(1) three initiatives to help combat the rising tide of foreclosures; and
(2) two new programs aimed at reducing the number of vacant properties within our
neighborhoods, stabilizing both the tax base as well as the community and the
families within it
And we believe that the GSEs can playa necessary and important role in assisting our
work in both of these areas and making these programs successful.

Foreclosure Prevention

Hardest Hit Fund (HHF)

Illinois was lucky enough to be one of the 18 states selected to receive Hardest Hit
Funds from the US Treasury. In September of last year, IHDA launched the Illinois
Hardest Hit Program as a financial lifeline for those families burdened by job loss or

reduced pay. With $445 million in federal resources, our program provides up to
$25,000 in mortgage assistance to homeowners who have experienced an income
reduction due to unemployment or substantial underemployment, allowing them to
maintain their home while they work to regain employment and financial stability. The
Program offers Reinstatement Assistance - a one-time payment of all mortgage
arrearage, fees, and penalties - and help to the homeowner in managing their ongoing
Monthly Mortgage Payment for up to 18 months.

To date, we helped more than 2,200 Illinois homeowners keep their home and we
continue to provide assistance to new households at a rate of about 20 per day. I am
very proud to say that Illinois now has the 2 nd highest performing Hardest Hit Program in
the nation, second only to California, which has nearly three times the number of staff
and allocated dollars.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00076

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.027

71
Testimony of Mary R. Kenney
Subcommittee on Capital Markets and Government Sponsored Enterprises Field Hearing
May 7, 2012

Illinois Foreclosure Prevention Network (lFPN)

What we discovered through our marketing of the HHF Program and the outreach on
our other foreclosure prevention efforts is that for families facing foreclosure, there is a
huge amount of fear, distrust and denial. And unfortunately, the fear and distrust is not
unfounded. Mortgage scams and fraud continue to be a significant issue in the
marketplace. Homeowners simply don't know where to turn or who to trust.

To address this issue, earlier this year under the leadership of Governor Quinn, we
launched the Illinois Foreclosure Prevention Network (lFPN).

This Network has two

important goals. First, to coordinate in one place the myriad of foreclosure prevention
resources available in Illinois. The alphabet soup of HAMP, HARP, HHF, and other
resources may make sense to us, but they are very intimidating to someone facing this
difficult situation. The second goal is to strongly brand and market the Network as a
safe and reliable resource that can provide homeowners free access to one-on-one
counseling and legal assistance.

The Network is supported by a website - www.KeepYourHomelliinois.org and a toll-free

number - 1-855-KEEP411 - to help struggling homeowners access the services and
programs available. It also hosts foreclosure mitigation events where homeowners
receive one-on-one counseling, access to loan servicers who can discuss loan
modifications and work-out agreements on the spot, help with Hardest Hit Applications,
legal advice and more - all free of charge. The Network includes paid advertising,
earned media, social media and other outreach. Since the Network launched, 21,600
Illinois homeowners have been connected to resources, including assistance from
qualified, HUD-certified housing counselors.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00077

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.028

72
Testimony of Mary R. Kenney
Subcommittee on Capital Markets and Government Sponsored Enterprises Field Hearing
May 7. 2012

Mortgage Resolution Fund (MRF)

In addition to its work on HHF and IFPN, the State has partnered with a number of
entities from the private sector - including Enterprise, who you heard from earlier - on a
very innovative program utilizing HHF funds. We set aside $100 million in Hardest Hit
dollars in order to create the Mortgage Resolution Fund Program (MRF).

In simple terms, the program aims to keep families in their homes by utilizing HHF
Funds to purchase delinquent mortgages at a discount; and then leveraging that
discount to permanently modify the mortgages of qualifying households to an affordable
level.

The Fund (MRF) recently made its first purchase of a pool of loans and is in the process
of boarding those loans and utilizing the lower principal balance, to temporarily modify
the loan such that the monthly payment is affordable to the existing homeowner. If the
homeowner is successful in meeting their mortgage payments for a period of six to nine
months, the modification will be made permanent. The hope is to then sell the new,
seasoned loans and revolve the loan fund so that it may purchase more loans.

This program is the first of its kind and is the only program in the nation that utilizes the
current, reduced market value of the property for the benefit of the homeowner so that
they can stay in their home.

Role for the GSEs

Over 100,000 new foreclosures were filed in Illinois last year. We believe that stopping
the flow of new REOs is the best and most cost effective approach to combatting the
plague of vacant properties destroying our neighborhoods.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00078

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.029

73
Testimony of Mary R. Kenney
Subcommittee on Capital Markets and Government Sponsored Enterprises Field Hearing
May 7,2012

And the GSEs have an important role to play in this regard. To date, all of the loan
purchases made have been through the private sector. In order to work more
efficiently, and to bring the program to scale, we believe that the GSEs must participate
by selling pieces of their portfolio at the current true market rate. By selling these
distressed mortgages, they will enable communities to leverage these discounts, write
down loan balances and re-underwrite mortgages to keep families in their homes,
Access to the GSEs distressed mortgages could make a significant difference in the
housing market while fulfilling the federal government's objectives by:

Reducing the REO portfolios of the GSEs and FHFA;

Stabilizing the overall housing market by reducing the number of vacant
properties on the market;

Promoting private investment in local housing markets through the significant

partner contributions to the program; and

Maximizing value to taxpayers by using HHF, a federal resource currently being

used to fund mortgage payments to commercial banks, to assist federally-held
mortgages,

Work on Vacant Properties

I HDA is also helping communities struggling with the aftermath of foreclosures, working
to alleviate the huge inventory of vacant properties. On average, the value of
surrounding properties on the same block as a foreclosed property can drop in value
between $8,000 to $10,000 4 , acting to destabilize entire neighborhoods.

IHDA received a total of $58 million under the federal Neighborhood Stabilization

Program. Through this program, we have worked to return vacant properties to the

Federal Reserve Bank of Cleveland

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00079

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.030

74
Testimony of Mary R. Kenney
Subcommittee on Capital Markets and Government Sponsored Enterprises Field Hearing
May 7, 2012

market and help spur redevelopment, and we have done this in direct partnership with
the communities across the state. Illinois has committed resources to re-develop over
450 vacant, foreclosed and abandoned properties to help low-, moderate- and middleincome households access affordable housing. And we are now leveraging these
investments through an innovative new state program.

Building Blocks
In addition to NSP, Governor Quinn recently launched his own program known as the
Illinois Building Blocks Pilot Program. Building Blocks is a multifaceted and
comprehensive approach designed to help communities and their residents along every
phase of the foreclosure continuum.

One of the lessons we learned through NSP is that the more concentrated the
approach, the more effective it can be. Accordingly, we selected six communities for
the pilot, using factors such as: (1) community support; (2) existing re-development
activity; (3) foreclosure heat; (4) vacancy rates; (5) existing market; and (6) recent job
creation.

The program employs a three-pronged approach within the chosen communities. First,
it aggressively targets existing resources to struggling homeowners through the Illinois
Foreclosure Prevention Network (IFPN) in an effort to curb additional foreclosures.
Second, the program provides direct financing to developers willing to acquire and
rehabilitate vacant homes. Finally, the program provides a robust and aggressive
homebuyer financing package - including $10,000 in down payment assistance

for

homeowners purchasing a vacant property in these communities.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00080

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.031

75
Testimony of Mary R. Kenney
Subcommittee on Capital Markels and Govemment Sponsored Enterprises Field Hearing
May 7, 2012

The goal is to stop the flow of new vacant properties 5 and restore existing vacant
properties to productive use by shepherding the process at each stage - acquisition,
rehabilitation and purchase.

And, while framed as a pilot, we believe that this program builds a replicable strategy to
help stabilize neighborhoods, protect property values, maintain the existing tax base
and preserve affordable housing stock.

Role of the GSEs

One important way the GSEs can help states address the vacant properties in
their communities is by assembling available properties by zip code and making
them available for bulk purchase at a reduced rate through governmental entities
that agree to assist in financing their acquisition and rehabilitation by private
entities. This would allow states (or local governments) to address large lots of vacant
properties in their communities in a way that is consistent with local planning and will
have a real impact. While several of the large banks have engaged and offered
reduced or even free access to their REO portfolio, we have not received the same
feedback from the GSEs.

While we are very excited that Chicago has been chosen as one of the pilot
communities for the REO to Rental pilot program, we have the following observations:

A scattered approach will not be effective. We learned through NSP that a more
targeted approach, specifically addressing the needs and concerns of a particular
community is most effective. Our understanding is that there are currently 99
properties in Chicago in the program, scattered throughout the region. This is

The GSEs could further this effort by allowing MRF to purchase delinquent loans within the zip codes
targeted to facilitate a modification of the purchased loan and allow the existing homeowner to stay in
their home.
5

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00081

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.032

76
Testimony of Mary R. Kenney
Subcommittee on Capital Markets and Govemment Sponsored Enterprises Field Hearing
May 7,2012

not enough to provide a critical mass and will likely have no effect on any given
neighborhood.

A local and leveraged approach is optimal. So many resources have been

dedicated to this issue that a coordinated and leveraged approach will best serve
to protect the public interest and stretch the taxpayer's dollar to maximum effect.

A mUlti-tiered approach will be required. It isn't enough to focus on one issue be it foreclosure prevention, or REO dispensation, or homebuyer support. We
need to leverage all three elements.

The Need for More Family Housing

The tens of thousands of vacant properties in Illinois are a constant reminder of the
families that have been displaced through this crisis and the significant need for
affordable, family rental housing. The number of severely cost-burdened low-income
renters has grown dramatically just as affordable housing stock has shrunk over the
past decade. 6 And now the foreclosure crisis - in Chicago, especially - has wreaked
havoc just not on single family residences but on small multi-unit buildings that playa
significant role in providing decent and affordable housing to our families. The need for
larger, affordable rental units to house these displaced families is larger than ever.

Role of the GSEs

The Congress can playa significant role in helping HFAs to address this issue. A bill
has been presented on several occasions allowing the FHA Risk Share Program to be
credit enhanced by GNMA The Risk Share Program is a partnership between the FHA
and local HFAs in which the HFA underwrites the mortgage and FHA and the HFA
share the risk of default The program has been very successful with very few incidents
of default, and is presents less risk to the federal government as compared to all other
FHA loans.

"The State ofthe Nation's Housing, Joint Center for Housing Studies at Harvard University, 2011

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00082

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.033

77
Testimony of Mary R. Kenney
Subcommittee on Capital Markets and Government Sponsored Enterprises Field Hearing
May 7, 2012

Currently, GNMA cannot credit enhance these Risk Share loans. Allowing a credit
enhancement by GNMA could lower the borrowing costs of the HFA by up to 200 basis
points, resulting in more competitive products for the private sector and, ultimately,
more affordable rents. In addition, the CBO has found that this proposal would come at
no cost to the Treasury and would provide over $20 Million in savings over ten years.
We believe that these savings will be even greater.

It is logical to assume that if the loans are not underwritten through the Risk Share
Program by the HFAs, they would be underwritten by HUD directly as a 100% risk to
FHA and still credit enhanced by GNMA, as is standard practice. By allowing Risk
Share loans to be credit enhanced under the same terms they would otherwise be able
to achieve, Congress would be reducing the risk and involvement of the federal
government in affordable housing by allowing the HFAs, who are best suited to meet
the needs of their community with this innovative tool, to take on a portion of that risk.

The change represents a good government, common sense approach in encouraging

not just a public-private partnership to development but expanding the ability of the
States to address needs within their communities more directly.

CLOSING
In closing, I want to emphasize three things.

First, I want to emphasize how important it is that the federal government forge a
partnership at the state and local level in trying to craft solutions to this crisis. Local
solutions cannot be crafted from Washington. The best way to stabilize our economy
and our communities is to utilize existing public-private partnerships that further the

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00083

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.034

10

78
Testimony of Mary R. Kenney
Subcommittee on Capital Markets and Government Sponsored Enterprises Field Hearing
May 7, 2012

goals of the Administration by providing for private ownership and maintenance with
long-term public oversight to ensure that stabilized communities stay that way.

HFAs have long provided that bridge. Over many decades, we have forged successful
partnerships with the private sector in helping to provide needed resources to our
communities. It is for this reason that the federal government turned to the HFAs to
spur the economy and development during the economic downturn. And the HFAs
responded. At my agency alone, we created 4,733 units of new housing, leveraging
nearly one billion dollars in new construction and creating 4,855 new jobs. HFAs can
continue to provide that bridge, albeit in response to a new crisis, providing a local and
tailored response to target resources in the way that is the most efficient and has the
most impact

Second, maximizing return (or minimizing losses) on one particular asset may not act to
maximize return on the GSE portfolio as a whole. In other words, stabilizing property
values within the overall market will add value and stabilize the GSEs' remaining
portfolios. To suggest that maximizing the value of one particular asset necessarily
maximizes the value of the GSEs' overall portfolio or reduces overall losses seems to
miss the larger picture. Moreover, I want to note that much of what we are asking the
GSEs to do--namely, sell delinquent notes and REOs at a discoun!--is something that
the market (private sector) is already doing, suggesting that the market value may not
be as high as the GSEs believe.

Finally, I know that there are those that argue that the federal government has no role to
play in stabilizing the housing market and should withdraw from any further intervention.
They believe that it would be better to allow the market to "hit bottom" and correct its
course. But I can't help but ask "better for whom?" Better for the market? Better for
Wall Street? Maybe. But certainly not better for the families who are losing their
homes. Certainly not better for the countless Americans who have lost their savings

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00084

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.035

11

79
Testimony of Mary R. Kenney
Subcommittee on Capital Markets and Govemment Sponsored Enterprises Field Hearing
May 7, 2012

and equity, Our economy has lost $7 Trillion in savings over the last four years, That's
almost half the nation's GOP,

It seems that any gains made on Wall Street will be

offset by corresponding losses to American families.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00085

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.036

12

80

May 7,2012
House Financial Services Committee
Subcommittee on Capital Markets & Government Sponsored Enterprises

Hearing entitled "An Examination of the Federal Housing Finance Agency's

Real Estate Owned (REO) Pilot Program"
Statement of Mr. Dick Pruess

On behalf of

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00086

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.037

Community Associations Institute

81
Chairman Garrett, Ranking Member Waters, and members of the subcommittee, my
name is Dick Pruess and I live in the Castlegate Homeowners Association in Pasadena,
California. Thank you for the invitation to testify this morning on behalf of Community
Associations Institute (CAl).

CAl is the only national organization dedicated to supporting community associations,

association homeowners, and the more than two million volunteers who serve their
neighbors on association boards. There are approximately 62 million residents of
community associations living in 315,000 individual associations across the nation.
Community associations are organized under state law as a homeowner, property
owner, or condominium association or a housing cooperative.

I am the volunteer chairman of CAl's California Legislative Action Committee. We

represent the interests of the nine million individual residents of community
associations in our state. As a homeowner living in a community association, I believe all
owners should be active in protecting their investment in their home. Working both
locally and at the state level in Sacramento helps me, my community association, and
the 49,000 community associations in California. I am pleased extend this work to the
U.S. Congress.

Our homeowners and communities have faced substantial challenges throughout the
housing crisis stemming not only from the collapse of home values but also the
complete breakdown of the foreclosure process. I believe considering the unique
perspective of community associations will be helpful as the Federal Housing Finance
Agency (FHFA) continues its pilot program to dispose of enterprise REO through bulk
sales to investors.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00087

nity Associations

Fmt 6601

Sfmt 6601

Instit

K:\DOCS\75726.TXT

P 9e

TERRI

12

75726.038

Comm

82
Impact of the Housing Crisis on Community Associations

All homes in a community association are bound by certain deed-based covenants,

conditions, and restrictions, commonly known as CC&Rs, as well as by association bylaws and other rules and regulations adopted by the association's board. Application of
these requirements ensures all residents-both homeowners and tenants- enjoy
access to amenities, that common property is maintained, critical association services
are funded, and reserves are set aside to cover significant future costs.

Community associations also undertake responsibilities such as road maintenance,

storm water management, waste disposal and other similar services that otherwise are
the responsibility of units of local government. These activities save local taxpayers
billions of dollars across the country each year. To fund these association services, all
association owners pay assessments, which are lien-based. Research shows that in 2009,
association homeowners generated more than $41 billion in funds to operate their
communities while also maintaining approximately $35 billion in reserve accounts.

It is generally accepted that a foreclosure or an abandoned home reduces property

values in a neighborhood. The resulting sale of these distressed properties only adds to
downward pressure on home prices. Otherwise stable owners watch as what little equity
may be in their home vanishes. It is even worse for those owners who already owe more
than their house is worth. This holds true for both association and non-association
homeowners.

How the Foreclosure Crisis Impacts Community Associations

Unfortunately, these negatives are compounded in community associations when
owners of distressed properties fail to pay their share of association expenses.
As the housing crisis has evolved to a continuing foreclosure crisis, community
associations have faced significant shortfalls in assessment income and report that

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00088

Fmt 6601

Sfmt 6601

sin

titute

K:\DOCS\75726.TXT

I)

TERRI

ge

13

75726.039

ciatio

83
assessment delinquencies have increased al an alarming rate. Without funds to
continue association services, the financial stability of these communities is jeopardized.

Assessment delinquency rates have almost tripled since 2005. According to a recent
nationwide survey of community association managers, 63 percent of associations now
have delinquency rates exceeding 5 percent, up from 22 percent of associations in
2005. One in three associations has a delinquency rate exceeding 10 percent, and for
almost 1 in 10-or close to 30,000 associations nationally-the rate is more than 20
percent.

In response to these high delinquency rates, community association residents are

increasing their regular assessments, voting for special assessments, deferring critical
maintenance projects, and reducing contributions to reserve funds. These actions,
which residents deem necessary to ensure continuance of critical association functions,
have increased housing costs for association homeowners and generated considerable
controversy within communities. However, such actions can damage the long-term
stability of a community and are not a solution to the crisis that association residents
face.

If this is not a good solution, why are these homeowners still choosing this path? The
answer to that question is straightforward: Associations must still pay their bills. Storm
water systems must be maintained; insurance premiums must be paid; residents cannot
live in condominium units when the building has no water or electricity; trash collection
cannot be halted; and common property must be maintained. These are not optional
services or luxuries that can be scaled back or eliminated to save money. These are
mandatory community costs.

To illustrate these points, I have included as an appendix to my testimony results from a

recent survey of approximately 120 community association managers and association
management companies in California. We asked about the impact of the crisis on their

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00089

nity A

Fmt 6601

oelation

Sfmt 6601

Insti

K:\DOCS\75726.TXT

9e

TERRI

14

75726.040

Comm

84
client associations and how this impacted homeowners. I believe you will find the results
of this survey to be informative; I personally found them astounding.

Lender and Servicer Behavior Has a Profoundly Negative Impact on Associations

It is frustrating for residents of associations when their neighbors stop paying
assessments for their share of community costs. What is infuriating though is when
homeowners leave their property after receiving a foreclosure notice and the lender or
servicer allows the property to remain vacant for hundreds of days before completing
the foreclosure. The association cannot track the prior owner and the other responsible
parties will not foreclose. The property languishes, and what maintenance and care it
receives come from neighbors and the association. Unfortunately, even when the
foreclosure is completed and the property moves into a REO portfolio, association
homeowners will more likely than not continue to shoulder the burden of property
upkeep. According to a second CAl survey of community association managers,
associations receive timely payment of assessments on less than 30 percent of REO
properties. That's tens of thousands of homes nationally.

The failure of lenders and servicers to maintain REO in community associations and act
as responsible property owners is consequential. As assessments increase because
fewer owners can contribute to the association's expenses, more owners fall delinquent,
thereby increasing the pressure on the association's ability to perform its functions. In
many instances, as association assessments increase, owners are forced to choose
between paying their assessments and paying their mortgage as they cannot afford
both. This can be a significant problem for owners with a fixed income. The choice in a
normal market might be for homeowners to sell; however, that option is not always a
viable one given the depressed state of home values and the substantial number of
owners with negative equity.

Fraudulent foreclosures and violations of servicing standards have also substantially

harmed association homeowners. Regrettably, in many of these instances there was no

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00090

nity Associ

Fmt 6601

Sfmt 6601

tio

s !nstit

K:\DOCS\75726.TXT

I P

TERRI

15

75726.041

Comm

85
reasonable opportunity to prevent foreclosure or for a borrower to qualify for or sustain

a loan modification. Lenders and servicers cut corners and were caught by federal and
state regulators. This added almost a year to the completion of these foreclosures,
forcing more association homeowners to pay extra housing costs.

By delaying the foreclosure process or failing to record a change in title promptly after
foreclosure, lenders and servicers avoid paying their fair share of association costs.
CAl's members do not believe it is equitable to allow the remaining owners in the
neighborhood to pay higher housing costs that in most cases benefits and protects the
value of these properties. Lenders and servicers must meet their obligations and not
push these costs on their neighbors. The inequity is even greater when homeowners
must pay higher housing costs due to lender and servicer fraud and negligence.

Lender and Servicer Failures Could Jeopardize FHFA Bulk Sales Plan in Associations
It is this failure on the part of lenders and servicers to move hopeless foreclosure cases
through the process, to maintain property, and act responsibly that may frustrate plans
for bulk sales of enterprise REO in community associations. CAl believes that FHFA and
its partners in the bulk sales pilot program should consider the unique aspects of
community association property ownership in the design and execution of these
programs. Otherwise, community association homeowners in states with high
foreclosure rates or which have been hardest-hit by the housing crisis may not receive
the intended benefit from efforts to put REO properties back into commerce.

Bulk Sales Program Should Support Community Association Model of Housing

To be successful, CAl's members believe an enterprise REO bulk sales program must
both account for and correct lender and servicer behaviors that have harmed
homeowners in community associations. Correcting these failures upfront will minimize
frictions that may frustrate bulk sales of enterprise REO in community associations and
will ensure that community associations can participate as full partners in moving REO

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

ff'

rn

Frm 00091

Ity A

Fmt 6601

ocl

Sfmt 6601

tions

In

tiL)

K:\DOCS\75726.TXT

I'

TERRI

16

75726.042

Co

86
back into commerce and stabilizing the larger community of which the association is a
part.

Satisfy Outstanding Liens Prior to Sale

It is very common for community associations to place a lien on vacant and abandoned
property for assessment delinquencies and other violations of the association's CC&Rs.
Treatment of association liens during foreclosure can vary from state to state as well as
by form of community association depending again on state statute. Several states have
adopted legislation giving super-lien status to association liens. These statutes
generally allow an association to collect up to six months worth of delinquent
assessments, subject to certain restrictions. Other states provide for different treatment
of association liens and payment of attorneys fees while the federal bankruptcy code
adds an additional layer of complexity. Given the scale of the crisis in many community
associations, it should come as little surprise to federal policymakers that associations
are seeking to use every legal remedy available to recover assessment delinquencies on
vacant and abandoned properties as well as REO.

To avoid needless delays and complications in closing bulk transactions on enterprise

REO, FHFA must ensure all outstanding association liens and other recoverable
amounts have been satisfied before completing a bulk sales transaction. Unless these
liens and other recoverable debts attached to the property have been satisfied under
applicable state law, any purchaser of this REO will likely be subject to legal action by
the association to recover these amounts.

Resume Timely Foreclosure and Recordation of Title Changes

Given the state of the housing economy, it may seem counter-intuitive to call for a
return to a functioning, legal foreclosure process, but for residents of community
associations this is an imperative. These homeowners cannot continue to face higher
housing costs, which places them at greater risk of default and foreclosure, as lenders
and servicers allow vacant and abandoned properties to lie fallow month after month.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

rnunity

Frm 00092

Fmt 6601

ciati

Sfmt 6601

ns in

tit

K:\DOCS\75726.TXT

TERRI

9 e j7

75726.043

Co

87
Our experience has been that servicers and lenders take only limited if any action to
counter the community blight created by allowing properties to languish in foreclosure.
CAl's members cannot comprehend how federal financial regulators seemingly permit
the rapid dissipation of value of lender collateral in this manner. When a home cannot
be saved, delaying the foreclosure process harms the borrower in default, the lender,
and association residents.

When a foreclosure auction is completed and title transferred to either Fannie Mae or
Freddie Mac, the enterprises, as property owners, are required to pay association
assessments. By doing so, the enterprises diminish the risks that other borrowers in the
neighborhood will default and also protect the value of their collateral. By ensuring
properties move through foreclosure properly and promptly, the enterprises can
enhance the return on REO sales and provide investors with properties that are in good
standing with the community association.

Structure of Bulk Sales Contracts Should Support Responsible Ownership bv Investors

CAl applauds FHFA for structuring the first bulk sales pilot transaction to require that
investors be pre-qualified prior to bidding. Pre-qualification of investors ensures that
bulk sales of enterprise REO are made only to well-capitalized, competent investors
with demonstrated experience managing a substantial residential real estate portfolio.

Given the unique aspects of property ownership in a community association, CAl urges
that potential investors also be required to demonstrate experience in managing
property located in a community association. Investors should be required to
demonstrate a working knowledge of community association law and community
management industry standards (or how this expertise will be obtained) prior to bidding
on any transactions with substantial amounts of REO located in a community
association.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00093

ity Association

Fmt 6601

Sfmt 6601

Instit~te

K:\DOCS\75726.TXT

Pa 9

TERRI

18

75726.044

Com m

88
Further, the pre-qualification process and bulk sales contracts should anticipate
purchaser business failures and provide to the greatest extent practicable for
maintenance and disposition of properties held by a purchaser that has filed for
bankruptcy protection. Associations currently experience significant difficulty in learning
who actually controls vacant, abandoned or REO properties. If an investor fails, the
bankruptcy process could result in questions of title to properties and other variables
that will put the community association in an even more untenable situation than
currently exists.

Policies Supporting Responsible Ownership

CAl strongly recommends that investor purchasers acknowledge basic contractual
obligations of common ownership in community associations, including timely payment
of association assessments. As a goal of the bulk sales pilot program is stabilizing
communities, CAl offers the following recommendations on policies that support
responsible ownership of investor rental properties in community associations:

Timely payment of assessments on association properties is imperative.

Purchasers must preserve, protect, maintain, and insure properties according to

all applicable association requirements at all times, including during any
vacancies.

Purchasers (or the enterprises) should provide a property report indicating the
condition of the property being purchased, plans to remedy deficiencies, and a
timeframe in which restoration of the property will occur.

Purchasers must provide the association with a single point of contact to

facilitate prompt response and curative action for all violations of CC&Rs, rules,
and regulations.

Purchasers must ensure lease terms comply with CC&Rs, rules, and regulations,
including any applicable association lease riders (i.e. CC&Rs routinely require
that tenants comply with association governing documents, with failure to do so
constituting a default under the lease).

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00094

Fmt 6601

ociatio

Sfmt 6601

Ins tit

K:\DOCS\75726.TXT

TERRI

a9

19

75726.045

Community As

89
Access to Mortgage Credit for Condominium Unit Owners
CAl strongly urges FHFA and the Administration to ensure that current condominium
project approval standards enforced by the Federal Housing Administration (FHA), the
Department of Veterans Affairs 01A), and the enterprises be revised to account for rental
units under this program. The FHA, VA, and both enterprises require a condominium
project to meet specific standards prior to insuring, guaranteeing, or purchasing
individual condominium unit mortgages. In short, if the condominium violates program
standards, access to mortgage credit is substantially restricted for unit owners.

There are numerous requirements under current FHA, VA, and enterprise condominium
standards that could be violated by bulk sales of REO in condominiums. These include
limiting to no more than ten percent the number of units in the condominium owned or
controlled by a single entity and mandatory owner occupancy standards. In particular,
FHA considers REO in its owner occupancy standard, so simply moving these units from
REO to investor ownership will continue the violation of FHA standards. Condominium
associations across the country are already grappling with stringent FHA condominium
rules. Unless these and similar guidelines at the enterprises are modified to account for
sales under this program, these unit owners will continue to have limited access to
mortgage credit.

Protecting the Rights of Condominium Unit Owners

CAl strongly recommends that purchasers be contractually bound to respect and
protect the rights of resident owners in condominiums. FHFA should take appropriate
action to avoid investor controlled condominium associations. In these cases, investor
owners control a majority of voting rights within the association, which may be sufficient
to unilaterally dissolve the association, degrade owner rights and duties, or otherwise
conduct the affairs of the association irrespective of resident owner interests or
involvement. FHFA must avoid any potential for the rights and interests of resident
owners to be degraded by investor owners.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00095

Fmt 6601

OCt

Sfmt 6601

tion

In

titute

K:\DOCS\75726.TXT

TERRI

110

75726.046

Community As

90
Conclusion
The failure of lenders and servicers to adequately preserve and protect their collateral
before, during, and after foreclosure has left community associations little choice but to
engage in litigation to seek judgments on assessment arrearages or to judicially seize
properties. Absent corrective action on the part of lenders and servicers, community
associations will continue to seek redress for payment of bad debt and other costs in
property disposal scenarios.

CAl's members do not seek to impede the progress of any program to support bulk
sales of enterprise REO. Rather, CAl's members believe such a program could be of
significant benefit to housing markets and to homeowners and tenants living in
community associations. However, our members reject the notion that community
association residents can be coerced or expected to fund property maintenance and
asset protection that is by contract a responsibility of another party. This is harmful to
homeowner interests and creates instability in affected communities.

Private investors purchasing REO in bulk are already encountering significant legal
obstacles to ownership in states and municipalities where the community association
model of housing is commonplace. Investor purchasers in California, Nevada, Arizona,
and Florida are facing legal actions by community associations seeking to recover
arrearages. Until these outstanding matters are satisfied, investor purchasers are often
unable to obtain clear, unclouded title to properties. Implementing the policies
recommended above will reduce these frictions in an enterprise REO bulk sales
program, improving returns for the enterprises and providing stability for the
homeowners who have shouldered the financial burden of maintaining these
properties.

Additionally, federal financial regulators should contribute to the success of a bulk REO
sales program and lessen the negative impact of foreclosures in community associations

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00096

Fmt 6601

oel

Sfmt 6601

institut

K:\DOCS\75726.TXT

TERRI

tlons

e 111

75726.047

Community A

91
simply by requiring that lenders and servicers fulfill their contractual obligations in a
timely manner. The Office of the Comptroller of the Currency (OCC) has taken such a
step by issuing OCC Bulletin 2011-49, which instructs lenders and servicers to meet
obligations to community associations under private pooling and servicing agreements
as well as enterprise sellerlservicer guidelines. The OCC's bulletin is an appropriate first
step to address what is a widespread crisis for community associations.

Fannie Mae recently reminded its servicers of their obligations to community

associations starting from a borrower's first missed payment to recording a change in
title to reflect Fannie Mae's ownership of the property. Interestingly, the bulletin largely
restated existing requirements under Fannie Mae's SelierlServicer Guidelines,
instructing servicers to be in compliance with those guidelines within approximately 90
days.

CAl members encourage that all federally insured depository institutions, mortgage
servicers, and state chartered institutions subject to federal supervision demonstrate
compliance with property preservation requirements for REO or properties in
foreclosure. Failure to meet these obligations may constitute a safety and soundness
concern as institutions face heightened exposure to litigation and reputation risk while
the value of the institution's real property assets is degraded.

On behalf of CAl's membership, I express our appreciation for the thoughtful and open
process being employed to craft an enterprise REO bulk sales program to the benefit of
households across the country. This is a critical issue for community associations and
CAl's members will continue to work as partners with the federal government to ensure
the program's success.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

rnuni:

Frm 00097

.A

Fmt 6601

oc~ation

Sfmt 6601

stit

te

K:\DOCS\75726.TXT

TERRI

112

75726.048

Co

92

Appendix A
What percentage of home owners in your association(s) were
delinquent in their assessments in 2011?

up t-o

1O~~

l1-}D"
.... 31-50;;

Half of HOA's surveyed had delinquencies of more than 10%.

46 percent of HOA's surveyed had delinquency rates between 11 and

30 percent.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

unity

Frm 00098

Fmt 6601

()

intions Ins

Sfmt 6601

itUt8

K:\DOCS\75726.TXT

P 98113

TERRI

75726.049

am

93
What is the period of time that these owners have not paid their
assessments?

44.4%

less than 3D days

31-Wdays
HI! 61 - SOdays
91-120days
29,0%

_more

2A-%

9.7%

97 percent of delinquent assessments are more than 30 days late.

73 percent of delinquent assessments are more than 91 days late.

44 percent of delinquent assessments are more than 4 months late.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00099

Fmt 6601

oc:1

tions!

Sfmt 6601

stitute

K:\DOCS\75726.TXT

Page 114

TERRI

75726.050

ornr-nunity A

94
What percentage of units that have been sold this year were due to:

% Conventional sale

0,;, Short sale

% Investor/Bulk purchase

15

10

20

25

30

49 percent of all common interest development sales in 2011 were

foreclosure and short sales.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00100

Associ

Fmt 6601

Sfmt 6601

ion

Institut

K:\DOCS\75726.TXT

TERRI

75726.051

Communi

95
How often has the lender not foreclosed even though the owner has
vacated the unit or failed to make mortgage payments?

25:; cf the tlCl"<f;

5D~f~

of :he ti~,e

75}; of :he ti me~,~!thetirr~

7.3%

50.9%

Lenders routinely fail to foreclose on properties after vacated by the

owner.

38 percent of communities report that lenders refuse to foreclose on

vacant and abandoned properties more than 50 percent of the time.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00101

Asso

Fmt 6601

iation

Sfmt 6601

Institute

K:\DOCS\75726.TXT

fO a

TERRI

e 116

75726.052

Communi,

96
Does the successor in interest delay recording the sale if the sale was due to
a foreclosure?

402%

Yes
No

60 percent of foreclosure sales are not recorded in a timely manner

by the foreclosing party.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00102

Fmt 6601

iations Institute

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

e 117

75726.053

Community As

97
If you answered "yes" to the above question then how long was the
delay?

15.7 %

Upto.0 d5ys
Ia Up to 120 days

Up:o 1M days
Moreth.an 130.d3YS

21.3%

73 percent of delayed foreclosure recordations were delayed more

than 60 days.
23 percent of delayed foreclosure recordations were delayed more
than 6 months.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00103

Fmt 6601

ociation

Sfmt 6601

!n

titute

K:\DOCS\75726.TXT

Pa

TERRI

e 118

75726.054

Cornrounity

98
How long does it typically take before foreclosing parties start
paying assessments?

Less: than 30 days

31- Wdays
~

61 - SC' days
91 ~ 120da}s

"121-13:1&'/5
~

6.1

more than 1gO days

<OJ,,

24 percent of the foreclosing parties begin to pay assessments

within 60 days of sale.

76 percent of the time, assessments are not paid until more

than 60 days after the sale.
28 percent of the time, assessments are not paid until more
than 4 months after the sale.
14 percent of the time, assessments are not paid until more
than 6 months after the sale.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

in

u nit

Frm 00104

y Ass

Fmt 6601

0 C

! a t ion s ! n s tit

Sfmt 6601

lj

t c

K:\DOCS\75726.TXT

TERRI

e 119

75726.055

Corn

99
Do the foreclosing parties pay ANY portion of the past due assessments?

79.0%

79 percent of the time, foreclosing parties fail to pay ANY portion of

past due assessments.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

rnmunity A

Frm 00105

Fmt 6601

soci

Sfmt 6601

tion

Institute

K:\DOCS\75726.TXT

TERRI

e 120

75726.056

100
lfyou answered "Yes" to the above questions then how often do
the foreclosing parties pay?

Up to' 10\ of the time

50.0'1.

Of the foreclosing parties that do pay delinquent assessments, their

"consistency rate" of payments varies from as low as 10 percent to as
high as 50 percent of the time.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00106

Fmt 6601

iation

Sfmt 6601

!nstitut

K:\DOCS\75726.TXT

Pa9

TERRI

121

75726.057

Cornrnunity Asso

101
As a result of non payment of the homeowner assessments, did the HOA:

Levy special assessments

None-ofthe

40

20

60

This chart illustrates the HARM that is done when foreclosing parties fail to
timely record sales, leaving the HOA with no ability to identify or locate the
new owner for purposes of invoicing assessments.

63 percent find it necessary to raise assessments, harming fixed

income owners, perhaps to the point of causing them to become
delinquent in their payments.

55 percent defer maintenance, drastically reducing the curb value of

the properties and community, in addition to incurring future
expensive repairs.

Only 22 percent of HOAs can or elect to levy special assessments due

to financial limitations of the association members.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00107

nlTy As

Fmt 6601

Sfmt 6601

122

tions Instit

K:\DOCS\75726.TXT

TERRI

75726.058

Cornm

102
41 percent of HOAs find it necessary borrow from their own reserves,
if they have any. This method requires prompt repayment and
supplants the very purpose of the reserve account which is for major
rehabilitation of the community's physical plant.

24 percent of the time, no relief is available to make up for the loss of

delinquent assessments. This eventually invites neighborhood blight,
which ironically reduces the foreclosing parties' asset value in the
property they now own.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00108

Fmt 6601

SOC!

tion

Sfmt 6601

In

ti

ut

K:\DOCS\75726.TXT

P 9

TERRI

123

75726.059

Community A

103
Written Testimony by
Michael Stegman
Counselor to the Secretary for Housing Finance Policy
United States Department of the Treasury
House Committee on Financial Services
Subcommittee on Capital Markets and Government Sponsored Enterprises
Monday, May 7, 2012

Chairman Garrett, Ranking Member Waters and members of the committee, thank you for the
opportunity to testifY this morning.
Prior to joining the Department of the Treasury as Counselor to Secretary Geithner for I-lousing
Finance Policy, I worked on housing policy in various capacities over the course of my forty-five
year career. Most recently, I was the Director of Housing and Policy at the John D. and
Catherine T. MacArthur Foundation headquartered in Chicago and, before that, spent much of
my career as a professor of city planning and public policy at the University of North Carolina at
Chapel Hill (UNC). During my long career at UNC, I took leave twice to serve in the Carter and
Clinton administrations as a senior official at the Department of Housing and Urban
Development (BUD).
Throughout my career, I have been involved with affordable housing issues, with combating
predatory lending, and with broadening access to safe, sustainable mortgage credit. At the
MacArthur Foundation, we invested millions of dollars to revitalize low-income neighborhoods
right here in Chicago _. communities that have been ravaged by a flood of foreclosures,
exacerbated by the loss of jobs and incomes due to the financial crisis.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00109

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.060

And so I thank you for holding this hearing to discuss the Real Estate-Owned (REO) Initiative,
because I think this emerging phenomenon has the potential to help stabilize communities while
expanding affordable rental housing opportunities. The Administration believes that the REO
Initiative can help bring stability to some of the hardest hit neighborhoods and attract much
needed private capital back to our housing markets. It can provide financial institutions,
including the Government Sponsored Enterprises (Enterprises), with an alternative, costeffective, channel to sell their foreclosed REO properties at scale in ways that complement
ongoing neighborhood stabilization initiatives. In the process, it can create a supply of much
needed rental housing for those families looking to rent, either out of choice or necessity. At its
best, it can also help stabilizc local housing prices by removing surplus homes from the for sale

104
market. With the right set of incentives and requirements for investors, this strategy can spur the
kind of long term investment that our communities need today.

****
The REO Initiative is part of the Administration's broader efforts to help heal the housing market
in the aftennath of the financial crisis. Our primary goal is to help prevent avoidable foreclosures
and accelerate recovery in the housing market.
A core component of the Administration's housing policy is to help more Americans refinance
their mortgages at today's low interest rates. Typically, when rates fall as they have in recent
years homeowners refinance their mortgages. This helps put more money back in the pockets
of American families, and, in turn, is one of the primary ways that lower interest rates can
support an economic recovery. Since 2006, however, less refinancing has occurred than the fall
in rates would suggest.
The Home Affordable Refinance Program (HARP) was designed to encourage more borrowers
who are underwater on their mortgage, or have little equity in their home, to refinance at today's
historically low rates. To date, HARP has helped more than one million homeowners refinance
their mortgage- and we recently worked with the Federal Housing Finance Agency (FHFA) to
expand and simplify the program's criteria so that we will be able to help even more borrowers.'
Difficult labor market conditions and other financial stresses in the wake of the crisis, however,
have made it more challenging for many borrowers to continue to make their mortgage payments
regardless of the level of interest rates. Today, one out of twelve homes with a mortgage is
either in foreclosure or is seriously delinquent. We have seen this in Chicago, which has a
foreclosure rate that is almost twice the national average.
The Home Affordable Modification Program, or HAMP, is a mortgage modification program
created to help financially distressed borrowers avoid foreclosure. The Administration's
programs, combined with private sector modifications spurred by our efforts, have helped
approximately 5 million homeowners across the country receive assistance to avoid foreclosure.
Here in Chicago, HAMP and other programs have led to more than 226,000 mortgage
interventions since the program's launch in April 2009 - twice the number of foreclosures
completed during this time.
In addition, given challenges with long-term unemployment, the Administration also announced
last summer that unemployed borrowers with FHA loans could receive up to a year of
forbearance on their mortgage payments, up from the previous maximum of four months. We
also included the twelve months' forbearance requirement in HAMP. As a result, the Enterprises,
as well as other major servicers, are now offering 12-months of forbearance for most
unemployed homeowners, giving borrowers the breathing room they need to resume making
their mortgage payment once they find new jobs.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00110

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.061

105
We have also asked the FHFA to allow the Enterprises to participate in the principal reduction
alternative of HAMP. Given the large percentage of outstanding mortgages that are currently
backed by the Enterprises, it is important that they fully participate in this program. Principal
reduction is an important tool to have at our disposal as we continue to repair the damage caused
by the housing crisis. In many cases, principal reduction makes economic sense for both the
homeowner and the lender helping reduce investor losses and preventable foreclosures over the
long term. That's the view of not only the Administration and others within government, but also
many private market participants. The most recent quarterly survey from the Office of the
Comptroller of the Currency showed that, of those mortgages held by private investors, nearly
one in tive that were modified reduced principaL Indeed, in the each of the last six months, more
than 40 percent of non-GSE mortgages modified through IIAMP included principal reduction.
And this is why the Administration believes it would be valuable to expand the availability of
this option to homeowners who happen to have their mortgages backed by the Enterprises. It
would not only help stabilize communities, but also reduce losses to the Enterprises and the
taxpayer. As Secretary Geithner has recently said, the number of families who would benefit is
not overwhelmingly large, but is significant and "any time we think tllcre's a way to help more
people stay in their homes, help facilitate transitions to other forms of housing, help repair and
heal the damage, we're going to keep doing that."

****
HARP, HAMP and other non-government programs have allowed millions ofhomeo','l,l1ers to
stay in their homes. However, we know we cannot stop every foreclosure. As a result, we must
work equally hard to find ways to reduce the impact foreclosures and distressed sales have on
our neighborhoods and communities. There are a number of ongoing programs, including
BUD's Neighborhood Stabilization Program (NSP), which helps support the rehabilitation of
communities significantly impacted by foreclosed and abandoned homes. Because of these
programs' success, the Administration proposed a $15 billion boost in hroad-based neighborhood
stabilization activities called Project Rebuild.
But these efforts won't be able to mitigate the impact of mass foreclosures on their own. As
estimated by Amherst Securities, more than 3 million homes are currently in the foreclosure
pipeline. Amherst Securities also projects that another 9 million homes are at risk of default over
the next six years - what many call the "shadow inventory" .- and to address this real and
potential supply, 3.1 to 5 million units of housing demand would need to be created over the next
six years. This rate of home buying activity will be difficult to generate given the continued
headwinds facing economic growth, continuing credit access issues, and the fact that many
would-be-homeowners do not have the wherewithal to buy a home. Enabling investors to acquire
these foreclosed properties will prevent them from sitting vacant, will help stabilize home prices,
and will prevent neighborhoods from suffering additional blight. By allowing investors to
purchase pools of foreclosed properties owned by the Enterprises and requiring those investors to
rent the properties, the REO Initiative provides an alternative approach to addressing this

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00111

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.062

106
significant oversupply in the market. It also provides the Enterprises and other holders of REO
with an additional market for selling foreclosed properties.
There arc several conditions that make this scattered-site, single family rental model an attractive
business investment today. First, the economics of an investor purchasing a home for the
purposes of renting it have become more attractive. In fact, home prices nationally are down by
over 30 percent relative to home prices in 2006, while rents are now up significantly in certain
areas. Research from the Federal Reserve demonstrates that this increase in rental demand is
partially driven by the fact that the majority of Americans who have recently lost their homes
transition to single family-rentals after foreclosure. We see this trend here in Chicago, where
home prices have fallen about 35 percent due in part to the recent wave of foreclosures in the
wake of the crisis, while rental vacancy rates are at a recent low ofless than 5 percent.
Second, the supply of homes for sale today and potentially in the future present investors with
the opportunity to purchase properties at a scale and geographic concentration that has not been
possible beforc. To effectively manage a large, scattered-site, single family rental housing
portfolio, investors must be able to spread their fixed costs across a larger set of homes - and the
large volume of real-estate owned propclty provides an opportunity to build to economies of
scale. Additionally, building to scale in a specific market allows not only for thc fixed asset
management costs to be spread over a greater number of properties, but likely reduces the
aggregate amount of fixed costs. Due to the large amount of foreclosed properties that could
potentially come to market over the coming years, investors may be able to achieve this scale
and geographic concentration.
While the emergence of this buy and rent business model is primarily driven by private capital
and entrepreneurial initiative, there is a public policy interest in supporting this phenomenon for
the reasons discussed earlier, and the REO Initiative can provide this support in a number of
ways. First, through this initiative the Enterprises can facilitate the aggregation of foreclosed
properties into larger pools that can be purchased in bulk. Second, they can increase the
transparency and awareness of where foreclosed properties are located. Third, they can create
policies and regulations that support financing for these types of transactions. And finally, they
can facilitate communication and coordination among the wide range of market participants that
are necessarily involved in the development of such a large and complex undertaking.
However, current broad-based enthusiasm for the REO Initiative must be tempered by an
appreciation for the inherent challenges in this business model. Investors and their partners must
be properly equipped to deal with the complexities associated with managing and maintaining
dispersed properties in a cost-effective manner. Moreover, as the character and local dynamics
of real estate markets vary, it is important for investors to understand the markets in which they
are investing. For example, it may not be a smart business decision for an investor from
California to buy a cluster of REO properties in the Chicago market without securing a local

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00112

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.063

107
operating partner with experience managing rental housing in the neighborhoods in which these
properties are located.
Additionally, it is important to note that owners of foreclosed properties have traditionally sold
their properties on a one-off basis through conventional retail channels. This conventional
disposition strategy makes it difficult for an investor to scale a scattered site, single family rental
business in a timely and cost effective manner. Absent a regular and predictable flow of bulk
sales, it will be important to develop ways (or the scattered site, single family rental business to
function profitably within the retail market.
Because of these and other challenges, the Administration has worked closely with FHFA to help
design and execute a pilot program to test investor demand for portfolios of geographicallyconcentrated REO properties. The Administration and FHF A have sought to do this in a way that
allows FHF A and others to assess both the impact on communities and the financial return to the
Enterprises relative to the value realized from transacting through the retail channel. To inform
the design of the inaugural pilot, FHFA convened an interagency group that included participants
from HUD, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the
Trea~ury Department, as well as executives from Fannie Mae and Freddie Mac. This group has
engaged with the public through a Request for Infonnation that received over 4,000 comments.
We have conducted ongoing outreach with nonprofit housing and community development
groups, investors, local government officials and other stakeholders to ensure that these
important constituencies provide direct input on how best to structure the program.
I would like to highlight the effort that has been taken to establish high standards that investors
must meet if they wish to participate. To realize the desired stabilizing impact on communities,
we have to get more than just a good price for the properties. Investors must be responsible
property owners. We want to encourage investment for the longer tenn that will sustain the
repair and restoration of the hardest hit communities.
Three controls built into the pilot will be important to addressing this concern. First, strict bidder
qualification requirements have been established that are intended to disqualify any investors
who lack the experience and expertise to successfully manage large numbers of scattered site
properties, or who have a history of behavior that could lead to bad results. This review includes
an assessment of an investor's ability to provide tenants with housing counseling services and to
provide credit bureaus with documentation related to a tenant's timely payment ofrent so that
those hard hit by the financial crisis can rebuild their credit scores more quickly. Although the
selection of winning bids will be conducted through an auction and based solely on the highest
bid offered, only those investors that meet the high standards built into the qualification process
will be pennitted to bid on the Enterprises' portfolios.
Second, effective operating guidelines and compliance systems will be a part of the contractual
agreement between the Enterprises and the investors. We are mindful that this is a transaction

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00113

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.064

108
between a private seller and private investors, not a government program. Nevertheless, it is in
the interest of the Enterprises, FHF A and the Administration that properties be well maintained
and have a stabilizing effect on sunounding properties and communities.
Finally, certain usage restrictions, including limiting the salc of properties over the first few
years of the investment, will create the right controls to ensure buyers invest and manage the
properties for the long term and help attract a more stable base of investor capital.
Ultimately, we hope that if this pilot is successful, it can serve as a model for private market
participants. While Fannie Mae and Freddie Mac own approximately 200,000 distressed loans,
other financial institutions own over 400,000 nonperfonning mortgages. A number of private
sector finns are considering, and in some cases executing, pilots of their own. Responding to this
demonstrated interest, the Federal Reserve Board issued clarifying guidance on effective policies
and risk management processes for its regulated institutions and detennined that prudently executed
rental initiatives by covered financial institutions could receive favorable Community Reinvestment
Aet consideration.
Investors from across the country are actively pooling capital as a sign of increased demand for
this business model. And lenders are beginning to develop products to provide investors with the
nccessary financing to invest in this space. We have heard anecdotally that the private sector is
looking to Fannie Mae's initial pilot as a model, in the same way that servicers relied on HAMP
when developing their own proprietary loan modifications. We hope that many of the same
investor standards and usage restrictions will be replicated so that communities are properly
protected, tenants are effectively served, and investors are appropriately rewarded for doing the
right thing.
I would also be remiss if I did not note that I am particularly encouraged to hear that certain
financial institutions are beginning to explore how deed-for-Iease, deed-in-lieu and short sale
programs, as well as nonperfonning loan sales, can be aligned with the REO Initiative.
Treaqury's Home Affordable Foreelosure Alternative Program, or HAF A, set a new standard for
short sale and deed-in-lieu execution by promoting pre-approved short sale transactions,
requiring that borrowers with a genuine hardship be released from liability for the remaining
mortgage debt upon sale, and establishing a reasonable industry standard for payments to
extinguish junior liens. Most recently, the FHFA has also provided leadership in this area by
directing the Enterprises to develop enhanced and aligned strategies for facilitating foreclosure
alternatives. This includes the requirement that mortgage servicers review and respond to
requests for short sales within 30 ealendar days from receipt of a short sale offer. These
foreclosure alternatives are an important complemcnt to a scattered site single family rental
business, as the leased or vacant properties that result from these actions can be purchased by
investors as well as by homebuyers.

****

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00114

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.065

109
In closing, I want to emphasize that the problems that this REO Initiative seeks to help mitigate
are of historic proportion. They didn't oeeur overnight, and they won't be fixed overnight. This
is why the REO Initiative is not a silver bullet. Rather, it is an important component of our
overall strategy to help communities by preventing avoidable foreclosure, expanding access to
refinancing, and supporting areas hardest hit by this crisis. I look forward to continuing to work
with all of you on assessing the merits of these pilot programs, and more broadly, stabilizing and
reforming the nation's housing market.
Thank you.

VerDate Nov 24 2008

13:06 Feb 01, 2013

Jkt 075726

PO 00000

Frm 00115

Fmt 6601

Sfmt 6601

K:\DOCS\75726.TXT

TERRI

75726.066