REO Rental Redux
By Andrew Jakabovics
Late last week, FHFA announced that Colony Capital had won the bidding for foreclosed homes in Phoenix, Las Vegas, and Los Angeles/Riverside County in the third transaction completed under their REO pilot program. As we noted with the announced sale of the Chicago pool, neither Fannie Mae, whose foreclosed homes were being sold, nor FHFA, who orchestrated the process, has shared the locations of the properties being sold to investors for use as rental homes. As a public service to municipalities and residents interested in knowing where the 328 properties in the Phoenix metropolitan area for which Colony Capital will be responsible, we are pleased to share the following map:
From a policy perspective, the vast area covered by the portfolio highlights a potential asset management challenge. The 326 properties we indentified in the land records of Maricopa and Pinal Counties are distributed across a vast area. (The Chicago pool covers a similarly large geography, and we may reasonably assume properties in the other metros are similarly dispersed.) Recognizing that care should be taken in assembling pools of REO for use as rental, it may be unwise to over-concentrate properties in a handful of communities; nevertheless, a far better balance should have been struck between concentration and dispersion.
In the current pool, the northernmost and southernmost properties are separated by nearly 100 miles and the portfolio stretches nearly 75 miles east to west. The overall concentration of properties is relatively low, which will both raise the cost of managing the portfolio and increase the likelihood that it is done poorly. This poorly constructed pool (courtesy of Credit Suisse) likely reduced the price paid to Fannie Mae (exacerbating losses to taxpayers) because of the increased management costs and could jeopardize local house price recovery if the properties are poorly managed and maintained.
If the goal of pooling properties for sale to a single entity was to immediately offer efficiencies of scale for management and other operational costs, a far better strategy would have been to assemble a similarly sized portfolio in a more concentrated way. Indeed, interviews we’ve conducted with other actors in the REO-to-rental sector have targeted specific submarkets within metro areas as a starting point from which to reach critical mass, specifically to be able to adequately manage their properties.
As of the time of this writing, there are roughly 2000 Fannie Mae-owned properties currently or soon-to-be-listed for sale in Arizona, including nearly 350 inside the I-10/101 loop. A far smarter strategy would have been to assemble a portfolio that would allow for much more efficient (and, by extension, likely successful) property management. A better disposition strategy is needed for the far-flung properties.
There is a silver lining, however. FHFA noted in their press release that the Atlanta pool did not sell, and “they will be evaluated for future transactions.” I hope that the evaluation includes a reconsideration of the geographic distribution of what constitutes a viable portfolio.