[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

AN EXAMINATION OF THE FEDERAL
HOUSING FINANCE AGENCY'S 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. 112-120

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HOUSE COMMITTEE ON FINANCIAL SERVICES

SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
Chairman Ranking Member
PETER T. KING, New York MAXINE WATERS, California
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois BRAD SHERMAN, California
GARY G. MILLER, California GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California JOE BACA, California
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan BRAD MILLER, North Carolina
KEVIN McCARTHY, California DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico AL GREEN, Texas
BILL POSEY, Florida EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK, GWEN MOORE, Wisconsin
Pennsylvania KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio JOHN C. CARNEY, Jr., Delaware
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

James H. Clinger, Staff Director and Chief Counsel
Subcommittee on Capital Markets and Government Sponsored Enterprises

SCOTT GARRETT, New Jersey, Chairman

DAVID SCHWEIKERT, Arizona, Vice MAXINE WATERS, California, Ranking
Chairman Member
PETER T. KING, New York GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma RUBEN HINOJOSA, Texas
DONALD A. MANZULLO, Illinois STEPHEN F. LYNCH, Massachusetts
JUDY BIGGERT, Illinois BRAD MILLER, North Carolina
JEB HENSARLING, Texas CAROLYN B. MALONEY, New York
RANDY NEUGEBAUER, Texas GWEN MOORE, Wisconsin
JOHN CAMPBELL, California ED PERLMUTTER, Colorado
THADDEUS G. McCOTTER, Michigan JOE DONNELLY, Indiana
KEVIN McCARTHY, California ANDRE CARSON, Indiana
STEVAN PEARCE, New Mexico JAMES A. HIMES, Connecticut
BILL POSEY, Florida GARY C. PETERS, Michigan
MICHAEL G. FITZPATRICK, AL GREEN, Texas
Pennsylvania KEITH ELLISON, Minnesota
NAN A. S. HAYWORTH, New York
ROBERT HURT, Virginia
MICHAEL G. GRIMM, New York
STEVE STIVERS, Ohio
ROBERT J. DOLD, Illinois

C O N T E N T S

----------
Page
Hearing held on:
May 7, 2012.................................................. 1
Appendix:
May 7, 2012.................................................. 43

WITNESSES
Monday, May 7, 2012

Burns, Meg, Senior Associate Director, Housing and Regulatory
Policy, Federal Housing Finance Agency (FHFA).................. 5
Dobson, Sean, Chief Executive Officer, Amherst Holdings.......... 24
Grossinger, Rob, Vice President, Community Revitalization,
Enterprise Community Partners, Inc............................. 26
Kenney, Mary R., Executive Director, Illinois Housing Development
Authority (IHDA)............................................... 28
Pruess, Dick, on behalf of Community Associations Institute (CAI) 31
Stegman, Michael, Counselor to the Secretary of the Treasury for
Housing Finance Policy, U.S. Department of the Treasury........ 6

APPENDIX

Prepared statements:
Burns, Meg................................................... 44
Dobson, Sean................................................. 50
Grossinger, Rob.............................................. 58
Kenney, Mary R............................................... 68
Pruess, Dick................................................. 80
Stegman, Michael............................................. 103

AN EXAMINATION OF THE FEDERAL
HOUSING FINANCE AGENCY'S 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. Today's field
hearing of the Subcommittee on Capital Markets and Government
Sponsored Enterprises, on the examination of the Federal
Housing Finance Agency's 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. That's just what
I hear about the weather in Chicago.
Mr. Huizenga. It's not raining enough.
Chairman Garrett. I appreciate everyone traveling so far.
We're 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 they're also doing so while backing over 90 percent of the
mortgage market right now. Put those two statistics together
and it's undeniable that this is an unsustainable situation in
which we find ourselves.
And so, it is fitting and it's appropriate that we come
here for a hearing such as this, to try and figure out how we
go forward 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 today's hearing is to further
examine the FHFA and their REO program, Real Estate Owned
program. And it's a pilot program they have, that began last
year. What is it designed to do? It's designed to determine the
best ways, if you can, to come up with, to do this not just in
the pilot program--they're just doing a small program--but to
do it in a much larger program, bulk sales. And you're 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;
it's a fairly complicated procedure. There are going to be many
questions and I'm glad that we have the witnesses here on the
panel today who have a background in this. We'll probably go
into some detail with you on some questions.
You run through the list and it's 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 we're 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 you're selling in bulk. See, I'm
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 they're 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 that's out
there? We would have to look at them and say, that's the way we
should be handling this, that's the way we can deal with it.
So, that's 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,
it's critical that we do it, but it's 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.
I'm hopeful that an efficient, cost-effective strategy or
disposition of the property can decrease the risk of these
entities, maximize the value for the taxpayers, and help the
housing market in these hardest-hit areas that we're examining.
One other thing, is that I just wanted to thank Congressman
Bob Dold for his work: first, for facilitating the hearing that
we're 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 we're
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. It's an honor to be here. I'm 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. I'm 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 we're 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 haven't 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 I'm here to help try to
figure that out.
As the chairman was saying--and I want to commend Chairman
Garrett for his leadership on this and many other issues--we
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 we're going to do this in a way that makes sense and
doesn't 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, it's a
privilege and an honor to be able to be here, and to have the
use of the courtroom, as well. We're all very much appreciative
of that.
And with that, I yield to the gentleman from Arizona.
Mr. Schweikert. Ms. Burns, in your testimony--please
understand, I may be one of the more aggressive Members of
Congress on this particular subject. I look at what's going on
in my market area, which is Maricopa County, Arizona, one of
the largest counties in the United States. And you're 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. There's demand and hunger, but yet our REO
pipelines are inefficient and aren't 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, you're 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 I'm 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 you're going to
loosen up this pipeline.
There are 2,500 properties, and you're 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, we'll 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.

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 Agency's 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 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. FHFA's 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 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, Chicago's
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 they're 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 single-family 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 we're very pleased with the high standards that Fannie and
FHFA set for investors interested in becoming qualified bidders
in the auction. Investors must be responsible and responsive
property owners committing to investing for the long term.
I'll 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 scattered-site properties, who don't 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 read--and here--are 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 Mae's 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 we're 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 REO-to-rental strategy.
Treasury's 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.
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 don't 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 we're 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 you're 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,
it's not really getting at the more local problem when there
are large numbers of REOs in certain 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, that's one of
the biggest issues, that's 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, we'll 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 we're 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 that's
available, making this look better than it is. So, can you kind
of tell me how that's going to--is 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 can't pick and
choose, they can't 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 wouldn't know how
long it was going to take to sort of execute from start to
finish, and we didn't want vacant properties sitting on the
market for an extended period of time. So, these properties--
or, so these pools are composed of, I would say, sort of
moderately priced homes--they're not in very poor condition,
and they're not premier properties. They're 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 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 don't. Ms. Burns may know.
Ms. Burns. No, I don't know. I think it's 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 don't 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 can't
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 don't have that off
the top of my head.
Mr. Schilling. That's fine.
Ms. Burns. And some properties don't get repaired at all,
some of them are in fairly decent condition when you come into
Fannie Mae and Freddie Macs, that don't 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
from--but, 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 I'm
clear on this. So, geographically, we're 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 be--so, 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 we're targeting
REITs as potential purchasers of these--these 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 neighborhood. Which, frankly,
that goal may have helped it get--helped us get out over our
skis. And having homeowners who maybe weren't quite ready for
that ownership. And I'm 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 we're 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 consider--the retail sales
execution will continue to be the primary way that they sell
their REO properties. There's not a sufficient concentration of
the units to sell them in bulk at those very large volumes, and
we agree that it's best to first try to get an owner occupant
into the property.
Mr. Huizenga. So, we're talking about a fairly small--I
don't want to--you keep using the word ``pool,'' because we
have too many pool discussions happening here, on the eight
various pools. It's a narrow slice of--
Ms. Burns. That's correct.
Mr. Huizenga. --eligible properties.
Ms. Burns. That's correct.
Mr. Huizenga. I think maybe going to my colleagues'
concerns here, if we still have a significant number of
properties, it seems like we're 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 we're talking 2,500 divided across
8 separate pools, and I'm a social science major, not a hard
science major, but my math would--it's 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. That's one of the things that we're
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
you're talking about how you need to have a local understanding
of what's happening? If I'm a California REIT, or a Michigan
REIT, and maybe I'm 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 aren't just investing, they are protecting their
assets, and they know what they're 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. We're talking about the requirements that
bidders, whether they bid on all eight or just one, have
experience or partners 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 I'm wrong, but they would be evaluated geography
by geography, sub-portfolio by sub-portfolio, 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 we're 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 don't 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, it's 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 partnerships--my 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. It's 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 we're going to do a
command control, it disturbs me. Because at some point you're
making an assumption that an investor, whether they're bidding
on 25 houses--which we need to talk about, whether you should
offer a pool size of that--or 1,000 houses, as we bought. We
don't know how to manage the money, we're not interested in
maximizing our rate of return, having good tenant
relationships, all the things you would do in managing the
money organically, without a command and control system.
So, with that bit of tirade, let's first start--and I
didn't 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 the--and that also mattered on our geographic
distribution--just 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, we're not playing unless
you can give us 1,000 properties and in a geographic, major
urban area, because that's the type of money we have to park
for our fees and management. And maybe this is best for Ms.
Burns. Why shouldn't 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 doesn't
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 isn't 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 the--the
mortgage and the mechanics, that you may have redemption
periods--
Ms. Burns. That's right.
Mr. Schweikert. --over here. But if you have literally half
your inventory, and in my understanding, it's dramatically more
than half your REO inventory that isn't even being marketed,
isn't that literally the inventory you should be grabbing and
moving into these?
Ms. Burns. The inventory that's 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. They're in a state of preparation for sale.
And that's sort of the way it always works, that there's 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, you're telling me, Maricopa County, the third, fourth
biggest county in the country, has 400 houses? That's 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, that's economically backwards.
The fact of the matter is, if you're in a marketplace that has
4 or 5 weeks of property for sale, and we're actually hearing
that the average contract, in at least my--and I know I'm being
Maricopa County-specific, is getting 8 to 12 contracts now.
Ms. Burns. Right.
Mr. Schweikert. We're in a fascinating cycle. And every
time a house sells--what 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 amount's 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 don't 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
you're 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. It's 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 you're talking about, saying, ``Look at how strong
the Arizona market is; you shouldn't 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 they're complaining that
investors keep buying the properties, what's 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 you're doing.
So, they're someone that doesn't understand basic housing
economics.
And I'm 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, you're pretty good. Hey, will you let me know when
I'm getting close on that timer.
Mr. Schweikert. We'll 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 General's
mortgage servicing settlement to impact, or how do you expect
it to impact the future of the REO companies, I guess? I'm sure
it's probably seen as a positive impact, I would hope.
Mr. Stegman. Congressman, I'm 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, I'm 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 we're 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 we're trying to do is to learn from that pilot, and we
don't 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 not--it 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,
it's 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
nobody is collecting kind of the baseline information and so
on. But it will play out over several years.
Mr. Schilling. You see, I'm 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. I'm with
David on this, in that I don't believe that we should--we 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 probably--not 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, that's why
we're in this mess we're in. People were buying houses who
should not have been buying houses. My wife and I, when we
started out, we couldn't 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 that's
going on.
Mr. Stegman. Congressman, there's a difference between--we
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 don't 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 wouldn't 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 have--you 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 person--
because the thing I find with the Federal Government, it's a
bureaucratic system to where they appoint their friends and
buddies. And it's 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,
I'm sure they're 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 you're talking about, institutional
investors, small investors, all the time about the kinds of
issues that we're talking about. So, we're 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.
Mr. Schweikert. Thank you, Mr. Schilling.
Mr. Huizenga?
Mr. Huizenga. Thank you. And I just want to--that's the
good thing about having a smaller field hearing like this, we
get lots of bites of the apple, otherwise we're--
Mr. Schweikert. More chances to ramble.
Mr. Huizenga. Yes, as freshmen, we're 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. You're saying
they're pools divided up between one to 500 homes. As Mr.
Schweikert was saying, they didn't really look at pools until
there were about 200 homes, 200 properties. I'm not sure if
that was--
Mr. Schweikert. We didn't 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 we're trying, if
we're going out and basically saying, ``Hey, who wants 2,500
homes?'' What kind of REIT might be out there looking at that?
That's what I at least heard you were indicating, that there's
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 to--and I
assume, Ms. Burns, it's probably your area here--describe how
this bulk sales scheme--and I use that in the British sense--
scheme, 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. Let's 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
you're 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
didn't sell, then investors had an opportunity to purchase the
property that didn't sell.
Mr. Huizenga. Basically, everybody has passed.
Ms. Burns. Everyone has passed it over--generally, 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, 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 don't know.
Mr. Huizenga. Yes, I didn't mean lots, we're using way too
many ``lots'' and ``pools.''
Ms. Burns. Yes, I know. I don't know the average size of
those pools. I know that they're 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 it's on there for 6 months, it's
probably on there for 18 months. That's what I'm hearing from
my former colleagues is, you have new property hitting the
market, it's either gone or it's going to just become a
dinosaur and it's going to stay, for whatever purpose. So, if
you could maybe--afterwards we'll 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, we're 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
shouldn't do bulk sales at all, because there's 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. We're to find
the middle ground between those two, and so we're 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, but--and I
know we have--the 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 you're timing, of course
I can just--share with me when--right now in the 2,500 that are
being broke down here. Was I to understand a large number of
these already have underlying rental contracts?
Ms. Burns. That's 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 don't?
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, we'll have a sense of their perspective
relative to our perspective, and we'll have the opportunity to
see, do they pay more if there's a renter in the home, do they
pay less if there's 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. There's 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, let's
say my new best friend here, he and I have our pool, we're one
of your qualified bidders, and we buy 400 properties. We're
blessed to get this. Are we deed-restricted, and if so, for how
long, before we're allowed to sell?
Ms. Burns. You're 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, it's
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, they're going to have to
come back to you for release clause releases on the 10 percent
I'm 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 that's specific to them, so that's a unique circumstance,
and we want these folks to be homeowners, they have been good
tenants, or a property that I can't 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. There's also the option to buy the properties
outright, just an outright sale. There are restrictions that
are imposed either way, but when--
Mr. Schweikert. Let's just work on our scenario. We're 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, you're going to have to have a whole
mechanism process where I'm 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 it's 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 you're saying. The flexibility and the optionality to
the buyer is gone. So, this, again, is a test and we'll 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
don't 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
don't have lots of data from the Nation and different
marketplaces, and correct me if I'm 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. That's
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, here's their cap rate, etc.''
We're flooded with data on this type of situation.
Mr. Stegman. We have access to newsletters you're talking
about, we see reports on varying cap rates. What we don't know
is the effects that these sales are having on the larger
market.
Mr. Schweikert. But that's easy to--
Mr. Stegman. And--
Mr. Schweikert. But that's absurd. You can actually then
look at the market area and you see what's 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.
Mr. Schweikert. I'm concerned because this is a very
sophisticated, very mature--
Mr. Stegman. Yes.
Mr. Schweikert. --very disciplined market. And my great
fear as--look, this isn't your world of expertise, and it
shouldn't be. But you're coming in and trying to rebuild the
world that's out there, where there are thousands, tens of
thousands of people who do this every day.
So, let's see, I had one or two other just sort of--how
soon, let's say this is magic and everyone loves you and it
just clicks off, and you're elated, how soon before you do the
next sale, and how far are you willing to scale up?
Ms. Burns. Obviously, we're 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 don't think I'm
allowed to tell you that. I'm following the SEC private
placement rules for this process. But based on what you said
earlier, it's fewer than you think.
Mr. Schweikert. Okay.
Ms. Burns. You said hundreds and hundreds before; it's not
hundreds and hundreds.
Mr. Schweikert. All right. And the next thing is, so, I'm
hearing that you haven't 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, I'll just go buy
on the auction steps instead?''
Ms. Burns. I don't know yet. We're very curious to see
that. I think we're 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, we'll 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 you're creating a
sort of restraint and barrier, and the inefficiency of grabbing
property that, you know, the deed has been transferred over is
yours not the market's. The efficiency of saying, here's our
inventory--90 days from now, we're putting it up for auction.
That's an inefficiency on your side.
And the last thing, then I'll 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 we're cleaning out our inventories. People are finding
jobs again, they're getting to be able to buy houses again.
It's coming back after. And in many ways the restraint, saying,
well, we don't 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 what's going on in some of the mortgage States
and some of the States that have had prolonged foreclosure
processes, and, oh, we're 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 don't 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 it's making the carpet, whether
it's fixing up the windows, something.
Look, if you will sell these and move them as fast, I will
stand in the parade and I'll defend you from those who don't
understand reality. But my great fear is by not pushing, by
becoming bureaucratic and not moving these assets through,
you're crushing people. You're 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 that's what's happening.
So, Mr. Schilling, outside of that diatribe, any other last
questions?
Mr. Schilling. I don't have any. I would just like to--I
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. Let's 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 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 what's necessary to have
that stimulative effect in the environment around us, and is
that satiating that demand? I'm 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 it's 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 let's 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 well-designed 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 we'll 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 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. It's 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 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 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.
It's worth adding that without this infrastructure to pass
capital from 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, 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? It's 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, it's 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 with--on 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. I'm not sure; I think I'm 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, Congressman 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 didn't 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 it's all about location,
location, location. What happens in Maricopa County in Arizona
is very different than what's 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 we're 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 doesn't 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
didn't 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 we're forming our own fund, the two of us,
we'll form a limited liability corporation and we'll start
buying REOs in those neighborhoods, that before our partnership
they wouldn't enter. So, it's how do you, from a nonprofit
standpoint, it's 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.
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 Bloomberg's, it's $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 don't
want, they tend to walk away from.
That may change as the new--as these new formations happen.
We want to make sure that it doesn't happen, that you don't
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 them--and 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. I'm 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 there's going to be financing
available from the GSEs, that sort of team.
And last but not least, I'm going to--I was going to talk
about this, but I'm 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, it's 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 couldn't 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 originations 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 I'll 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 States--or
unlucky, depending on how you look at it--selected 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.
Building 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 taxpayer's 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 has--CBO
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 Government's 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 we'll beg you to send us a copy. I know
we're a little over time.
Ms. Kenney. Sorry.
Mr. Schweikert. Mr. Pruess?

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 Homeowner's
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 it's 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 doesn't 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 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 won't 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
program's 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 didn't come home
earlier than I did.
Mr. Schweikert. It's 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, you're 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 that's very different whether it's Amherst to
North Shore to wherever they're 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 you're right, it's a
distinct need in different communities, and I really question
the ability of an outside investor that is just strictly
profit-oriented to come in and manage 99 properties that we're
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 it's 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 it's--from our perspective, it's
important to understand that there's a robust asset management
infrastructure that exists in the United States today for this
purpose. So, no one is--our business didn't say no one, our
business plan is not to try to make those consumer-facing
decisions at a central location. It's 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 it's worth
noting that we didn't get into this crisis by any other way
than producing one bad mortgage at a time. And we're 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 don't 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 doesn't mean that
there's not a place for nonprofits, there's not a place for
house advantage agencies, in certain segments of the market I'm
sure that it will increase efficiency in certain sectors.
Mr. Huizenga. So, it's not ringing hollow; right?
Mr. Dobson. No, it's not ringing hollow.
Mr. Huizenga. Yes.
Mr. Dobson. It's not ringing hollow, but that level of
expertise is needed and it's 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 you're 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 everyone's, I think. We
obviously did no subprime, I testified to that. But we saw,
actually, we had very low rates in delinquency, 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 it's a
very specialized program. And the communities are very much
involved, and we have pre- and post-purchase counseling that's
associated. The homeowner is actually connected to a counselor
through that process, as well. So, it's something that--it's
obviously part of a pilot program that was launched by the
Governor, but that we're going to monitor very closely. So, we
had probably 12 reservations under the program, and it's been
for like 30 days. I think early signs are that it has provided
some incentive. Vacant homes don't sell; they don't 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 things--I was born and
raised in the west end of Rock Island, where there's 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 we're 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 there's
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 don't think that this is some
lofty 10-year measure, this is something you'll 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 you'll 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 isn't a geographically focused
issue. This is a--There's a point in time when investor--when
consumer base simply doesn't qualify for mortgage in the volume
that's 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. I'm 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, we're helping put that floor down.
And so, I'm going to go ahead and yield back.
Mr. Schweikert. Thank you, Mr. Schilling. Now it's my turn.
Sorry, this is one of the most important subjects in my world.
Do I still have someone from the GSEs in the back listening?
All right. In that case, we're 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 house--the folks have been under foreclosure for 3 years, 2
years, they haven't paid an HOA payment in that time, why won't
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
there's a foreclosure it severs any of the HOA liens you have
placed on the property; is that also true in California?
Mr. Pruess. It's true if it's 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 it's agreed to, then they're
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. We're trying to get a paying owner in the
building. That's the biggest problem.
Mr. Schweikert. And this is one of those unintended
consequences. I have a couple of HOAs, actually, one in central
Scottsdale, it's 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 they're both within--the GSE is
waiting to pull the trigger to do the foreclosure. And they're
going on, I think, 2, 2\1/2\ years now, for some, and we can't
get an answer why they won't 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 is--it's a crime, but people were
allowed to take out loans like that. He wasn't 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 don't 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 about--now, 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
that's unsavable. That you just say, write it off. But when
you're 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 they're
going to do the bulk sale, 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 it's actually more than that. I
think if we had either--and 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 aren't being ignored. And so,
if there's 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 wouldn't it be natural economics to
say, hey, if I'm paying property tax on the improvement of this
property, and there's no way I'm going to rent it, and my rehab
costs, and I can't get my rate of return, we run the tractor
through it so at least I minimize my property tax exposure.
Isn't there some basic law of economics that's going to help
me--
Mr. Grossinger. That's exactly what I was saying. There are
many, many properties for which the outcome shouldn't
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 we--our 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 church-based housing groups in our--
in a neighborhood because they wanted it and I didn't. So, I'm
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 of--it's
something that stands on its own. I found on some of the small
properties I would find, a little--a family would come to me
and say, look, we're going to do it. And that was their--Ms.
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 investor's property rights in
that loan instrument to be executed?
Ms. Kenney. It depends on where in the State it's filed. In
Cook County, it's particularly long. There's a foreclosure
mediation program that I think is pretty--
Mr. Schweikert. In Cook--let's 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 that's right.
Mr. Schweikert. Because of that type of mechanic, should
Illinois lenders require higher interest rates because there's
an additional risk premium because of the legal process here?
Ms. Kenney. I'm sure it's something that lenders will start
to look at. I don't 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 wasn't 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, let's go 3, 3\1/2\ 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, we're 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 had--I'll
use a more aggressive deed of trust, foreclosure mechanics,
that by moving inventory actually helped a stimulative effect,
but also got rid of--I used to have a housing professor who
said, ``We all grow up here, the world moves in supply and
demand, and in housing it doesn't. In housing, it's
anticipation of supply and demand.'' And if I'm always
anticipating another wave of foreclosures, it--yes, it's neat
because I get to control the timer--that actually that's one of
the great sins in many of the marketplaces around the country,
is they're 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 is--the
recent recognition is really devastating when it comes to
vacant properties. And so, for Cook--there 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
can't do anything with them even if they wanted to. We're
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 don't have to
worry about individual property rights to the homeowner,
because there isn't anyone living there.
Mr. Schweikert. But in many ways, you're also speaking to
the HOA problem.
Mr. Pruess. I will give you some quick statistics in--but
we're a nonjudicial State in California. From date of notice of
default until date of sale, it's 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. It's only roughly 10 to 11
percent of the units that get sold to a third party, which is
usually an investor. And the investor's time, then, to sell, it
runs, I believe it's 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, you're 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 have--they run with the--
Mr. Pruess. But then it's the--
Mr. Schweikert. The foreclosure is the severing instrument.
And once--I'm the bank and I own it, I have taken--it's REO
property, I owe you the HOA.
Mr. Pruess. That's what the law says. And I hope you have
been able--had a chance to look through these pie charts that
are back here, because you'll see how bad these banks have been
performing--
Mr. Schweikert. But the banks--
Mr. Pruess. --on doing what they're supposed to.
Mr. Schweikert. So, you're saying, but the banks owe it,
but they're not paying.
Mr. Pruess. They're not paying.
Mr. Schweikert. Okay. That's a--one off issue.
Mr. Pruess. And I know that--the State and Federal level,
that they are performing. But they're 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.
I'm going to let Mr. Schilling--he had a couple more
questions, and then I want to finish with one or two for Mr.
Dobson, and then we'll 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 aren't. I think--I remember
Meg Burns said something like they're looking for investors who
want to be profitable yet civic minded. And I'm 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 there's 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 there's enough out there
to make it. Where those partnerships are going to work, it's
going to be very successful. And it doesn't have to be--what
we're doing with our newfound partner is an actual economic
partnership where we're building a fund together and we'll act
in a 50/50 partnership. It doesn't 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, it's all the silly money that's
floating around in this country. Billions and billions of
dollars is looking for a better return than in a CD.
Mr. Schilling. That's 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, it's tens of thousands.
Mr. Schweikert. Do you care when taking down an individual
property or package, whether they're 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 you're 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, you're 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. I'm so glad you're 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. I'm 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. That's 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 the--even though there's that horrible emotional
experience--
Mr. Dobson. Right.
Mr. Schweikert. --but create some lineage of stability
where there's 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, you're also making the
argument for if you--if you cannot mitigate it, there's not a
short sale, there's 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 it's--for 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 what's 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 you're
acquiring, and you're obviously acquiring in the Maricopa
County markets, and I don't know what other markets, your
average takedown, how much in rehab are you doing to each
property?
Mr. Dobson. We're spending about $8,000, and it's 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 it's an extensive
rehabilitation, because the rental markets are unbelievably
competitive. We pride ourselves in the data that we gather and
we're able to get down some interest and infrastructure is
driving this thing.
Mr. Schweikert. So, with that variance, literally for every
hundred houses you're buying, you're ultimately spending--
Mr. Dobson. About $1 million.
Mr. Schweikert. Yes, $800,000.
Mr. Dobson. And local, that's 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 I'm 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.]

A P P E N D I X

May 7, 2012

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