Proposal to bulk sell REO could hurt home prices: Radar Logic (by KERRI PANCHUK)

Thursday, August 25th, 2011, 3:00 pm

At least one housing analyst is pushing back against a government proposal to dispose of the government's real-estate owned properties through bulk sales to investors.

Quinn Eddins, director of research at data firm Radar Logic, concluded in the latest RPX Monthly Housing Market Report that housing remains a drag on the economy and home price stability could be negatively impacted by the Fed's proposed REO-disposition plan to sell  Fannie Mae,Freddie Mac and other government-held inventory in bulk.  The RPX Composite price index, which tracks home values in 25 metro areas, showed a 4.7% drop year-over-year in June.

Eddins said analysts are concerned about the Fed's proposal to cut down on the number of government-owned distressed properties by allowing  investors to buy these REOs in bulk for the purpose of turning them into rentals.

"Unless careful steps are taken to prevent it, we fear that bulk sales of REO properties could have an adverse effect on the appraised values of homes, and therefore home sales," the RPX monthly report warned.

Eddins believes a bulk sale could result in markets with a large number of low-priced homes with "misleadingly low appraisals" on REO properties — skewing home prices across the board.

"The low appraisals could then scuttle home sales that do not involve REO properties," Eddins wrote. "Even if local appraisers do not use the bulk-sale properties as comps, there are many automated valuation models that would likely incorporate the prices of those properties unless there was some way to designate them as bulk-sale properties. This issue should be taken into consideration by anyone trying to implement a bulk-sale program."

The report goes on to say bulk sales will likely result in the GSEs recording losses on the REO properties when comparing the sale amount to the principal on the defaulted loan. "We believe these losses, which will ultimately be passed to taxpayers, could be huge," Radar Logic said.

Instead of going the route of selling the properties to investors, the RPX report recommends the Federal Housing Finance Agency focus on restructuring delinquent or distressed loans to cut down on the flow of properties to government portfolios.

Eddins says the Fed could then rent out properties from its REO portfolios by working with private-sector property managers.

"We believe our two-pronged strategy will reduce the REO portfolios of the enterprises and the FHA and reduce the oversupply problem currently facing the housing market while avoiding a devastating loss to taxpayers," Eddins writes.

The plan will officially be proposed by Radar Logic next month.

Looking forward, the RPX report said "housing is poised for further weakness," but analysts expect a recovery eventually.