#168 Winter 2011-12 — Capital Markets

The Hard Part

Reclaiming REO at a scale that protects neighborhoods will involve a delicate dance between ground game and national reach, and between nonprofit and for-profit capacities.

Photo courtesy of Los Angeles Housing Department

Roof replacement on a former REO property on West 80th Street, South Los Angeles

Partnership Potential

Beginning after the federal RFI on REO-to-rental was announced last fall and picking up as the REO to Rental pilot was launched early this year, a number of capital markets firms have begun to talk about developing large scale REO purchase plans. A February 1 Bloomberg story that reports “Private equity firms are jumping into distressed housing as the U.S. government plans to market 200,000 foreclosed homes as rentals to speed up the economic recovery,” describes firms putting together funds of $450 million (Oaktree Capital Management and Carrington Holding Co.) to $1 billion (Waypoint and GI Partners) for REO purchases.

Once these large players enter the market with funds and a rehab and rental or lease-purchase strategy, what then? All indications are that lenders will force them to accept some low-value properties as part of the pools they purchase. Some of these may be truly worthless, and their proper destination a land bank. It might benefit everyone if those properties were separated out by the lender and donated (with funds to cover demolition), leaving sellers with higher value pools and buyers not stuck looking for a way to dispose of problem properties.

Other properties are in between, however, much as with notes — they could be viable, given some specific market knowledge, local connections, and access to some subsidy and/or patient or below-market capital, but the private equity firms are not likely to know what to do with them.

Could neighborhood stabilization organizations like CAPC, GMHC, or the local NSP programs act as partners to receive those properties the private equity funds don’t want and might otherwise flip or walk away from? This could solve a headache on both sides. Nonprofits have struggled with access to properties in their areas at scale. Private investors who buy large pools have to figure out what to do with the lower value properties without causing collateral damage. Nonprofits should not open themselves up to being used as private equity’s “trash can” for the real junk, but there could be a subset where a transaction could generate real value for both sides.

“We have to figure out how to encourage sales of REO to a broader universe of buyers,” says NCST’s Craig Nickerson. “You need as many buyers as possible so that we can aggregate enough of the raw material to make a difference in a community. It’s not a question of buying power, but using our resources more creatively.”

“I think it doesn’t have to be painful for us to carve out these collaborations,” says Eric Belsky. “You need someone as orchestra leader saying, ‘You, private investor, can play this instrument in this area.’ It doesn’t have to be control, it just has to be choreographed so we have synergy.”

“The worst mistake we can make is retrying unsuccessful methods,” says NCST’s Nickerson. “The future will not look like the past.”

Matthew Brian Hersh, Shelterforce senior editor, contributed to this article.

OTHER ARTICLES IN THIS ISSUE

  • Interview with Ron Faris, Ocwen CEO

    April 25, 2012

    We speak with Ocwen CEO Ron Faris about why principal reduction makes business sense and some of the myths that get perpetuated about it.

  • Stabilizing Urban Neighborhoods: Q&A with Elyse Cherry

    April 25, 2012

    Boston Community Capital's SUN program has gotten a lot of media attention. How is it working and what's next?

  • Tackling the Challenge of Scattered-Site Rentals

    April 25, 2012

    Attention is turning to single-family rentals as a way to keep a growing inventory of foreclosed properties occupied in a credit-constrained market. But scattered-site rental has long been considered a very tough nut to crack for nonprofit housing groups. How do those who make it work pull it off?