REO firms are on the lookout for new "mission" metrics based mostly on suggestions from GAO

Companies selling vacant foreclosure properties are concerned about a new recommendation from the Government Accountability Office that could prompt federal agencies to measure their work in new ways.

One agency, the Department of Veterans Affairs, has already committed to the recommendations of the report published last Friday. The report calls for new data to be collected that reflects whether sales results are in line with an agency's mission. In the VA's case, this means that REO property purchases by veterans are measured in their regular monthly performance reports.

The timing for this change might be good now as the volume is particularly low, companies operating in the real estate market acknowledge. There is concern, however, that either the rallying process or the reforms it might lead to could bring things to a halt later as activity picks up.

"I think the time is right if you want to add to the process," said Richard Kruse, principal at Gryphon USA, a distressed asset manager. "The question I would have on my mind is what happens when things open up again."

GAO may not have known that REO activity would be restricted to the extent that it was due to pandemic foreclosures and forbearance, but it did determine that it was generally declining before that due to long-term economic expansion.

This trend played a role in his conclusion.

"The reduction in foreclosed properties gives agencies a chance to see whether their activities in this area are aligned with their roles," said John Pendleton, GAO director of financial markets and community investments.

Last year, for example, the Federal Housing Administration's foreclosed housing stock was at a low not seen since 2004, and that of Fannie Mae and Freddie Mac was at its lowest level for at least this year.

(In the study, there was limited data from Fannie in the study as it was an open litigation related to REO sales with the National Fair Housing Alliance. The NFHA has alleged racial discrimination in Fannie's REO management practices. The GAO comments on or does not address developments in pending litigation in his report, and Fannie and the NFHA did not have an opinion as of the cut-off date.)

The GAO investigation was conducted in response to a call from Congress several years ago to investigate, "How federal agencies monitor property real estate, including identifying gaps in the process that could affect communities."

This request was aimed at building on previous Congressional reviews and improvements in this area that emerged from the foreclosure crisis during the Great Recession but have new relevance in light of the pandemic, according to GAO.

With a few exceptions like Freddie Mac's First Look program, there is relatively little data-based tracking on how or whether the foreclosure sale results reflect the missions of government agencies, the report said.

The Department of Housing and Urban Development did a limited study back in 2002 which showed “positive” results when houses were sold specifically to local teachers and law enforcement officers. However, according to its response to the GAO report, it has generally stated that the impact of "missions" "is not easily quantifiable".

This agency will continue to update and expand the research carried out to date, as indicated in the reply letter from the HUD's Deputy Assistant Secretary-General, John Garvin.

The REO sales industry has mixed feelings about programs like First Look and HUDs, which are designed to collect more information on results, as they are specifically designed to give owner-occupiers or nonprofits time to bid on properties before they are offered to investors.

There is debate as to whether it would be more beneficial for a community to sell a vacant foreclosed property quickly to avoid further deterioration in condition and value, or whether it would be more beneficial for a community to delay the sale in order to be more selective who the property is being sold to.

In some cases, investors help stabilize a neighborhood by preventing this type of deterioration, according to Kruse and the report. He suggested that programs that enable faster sales could do more for a community.

The bottom line for REO management companies is that they want to follow any reasonable guidance they get from the federal agencies they work with, but they hope the work required to do this has a clear purpose that won't prove counterproductive, said he.

"We can get this information, but I think we should think about the benefits of having it," said Kruse. “For me, it is better for the community to bring the property onto the market and sell it than to leave it there and find an optimal buyer. But sometimes there aren't financial reasons to do things. I can appreciate that too. "

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