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Asset Management

Preparing for Rain While the Skies are Blue

Now is the Time to Take Control By Rebecca Smith After a long run upwards, the real estate market seems to have reached an inflection point. Interest rate increases have certainly had a dampening effect, but it remains to be seen whether the inexorable rise in asset values is temporarily paused or if we are now on a downward trajectory just as steep as the way up. The market may be a roller coaster ride for the next year, so should we be preparing for another buying frenzy or bracing for a stream of defaults and foreclosures? The real estate owned (REO) market has been relatively dry over the last two years, but changing conditions could leave lenders, servicers and agents unprepared for a flash flood. Let’s explore the forecast for the REO market and how to prepare for what may be coming. Clouds on the Horizon Today, there are indications that the real estate market which has enjoyed an enormous run-up in the COVID era is now headed toward a correction, the severity of which is unknown. Recent data shows that the record rates of appreciation during the pandemic appear to be waning quickly. August price appreciation slowed to 12%, compared to 15.4% in July according to the homegenius Home Price Index from homegenius Real Estate. The slowing market is a natural result of the Federal Reserve’s aggressive action to combat inflation. Over the course of 2022, the Fed raised interest rates 3.25%. As a result, mortgage interest rates have skyrocketed to their highest in 15 years. In response, the sentiment of homebuilders and homebuyers has turned sharply pessimistic. The Wells Fargo Housing Market Index which measures the outlook of homebuilders has plummeted in recent months from 76% positive in April of this year to just 43% in October. The Chief Economist at the National Association of Homebuilders (NAHB) is sounding the alarm declaring that the nation has fallen into a “housing recession.” This is confirmed by the value of the nation’s largest home building companies. According to the S&P Homebuilders Select Industry Index, which includes home-manufacturing giants such as Masco and Owens Corning, shares have fallen more than 30% this year while the broader S&P 500 has fallen 24%. But No Downpour. . . Yet In the midst of all this gloom, homeowner defaults are ticking up slightly. However, most are pre-COVID or COVID-related defaults, which were paused during the pandemic, finally coming through the pipeline. As of yet there has been no indication of a major storm on the horizon. In fact, the Mortgage Bankers Association reported mortgage delinquencies dropped to the lowest rate ever recorded in the second quarter 2022. Unlike the fallout of the Great Financial Crisis of 2008, most homeowners are not under water on their mortgages. According to ATTOM data from the second quarter 2022, because of the appreciation in home values, 91% of homeowners facing foreclosure now have positive equity in their homes. If they get into trouble, they could still sell and avoid foreclosure. Dark clouds but no storm means we are in a “wait and see” phase. Servicers, banks, owner/operators, vendors, and agents are trying to determine how best to prepare for what is to come. Analysts do not believe we’ll see pre-pandemic REO volumes until possibly the latter part of 2023 with defaults trickling in from now until then at a steady pace. But it’s important to remember that borrowers who find themselves in trouble, perhaps because of a job loss or other life changing event, usually take about 12-18 months before they exhaust all other options (savings, friends and family assistance, etc.) and face a foreclosure sale. Prepare Now and Take Control The last time the real estate market was hit with a wave of defaults and foreclosures was during the Great Financial Crisis of 2008. Back then, few servicers were ready to handle the enormous volume, leading to the emergence of a small industry of outsourcers to take up the slack. As the market gradually stabilized and REO properties were disposed of over time, most of those outsourcers moved on, consolidated or exited the business. Normalized volumes allowed servicers to handle the flow of REOs on their own and many took this function back in-house. So far so good. But if the volume increases again, will they still be able to process REOs with the current staffing, or will they find themselves overwhelmed? This is a good time to ask the question. Servicers are already seeing an influx of homeowners requiring loss mitigation assistance and, as a result, have their hands full carefully navigating legal and regulatory requirements as set forth by regulatory agencies. In such an uncertain time for the market, it would be prudent to make a plan now to handle higher volumes of REOs. That could mean reviewing and streamlining your current in-house capabilities or talking now with an experienced outsourcer. Only a few nationwide outsourcers remain in the market, and they’ve demonstrated enough strength and knowledge to survive when the market was lean and can be expected to have the resources to quickly ramp up capacity. For example, the homegenius family of companies, including its affiliate Radian Real Estate Management LLC, maintains a nationwide network of over 40,000 vendors including contractors, property managers, and real estate agents that can help investors acquire, rehabilitate, and market investment properties. In addition, RREM provides full-service asset management capabilities that can help servicers get the best execution on their properties and potentially mitigate losses after a foreclosure sale. Many things could change in the coming months and beyond. As persistent inflation continues to resist the Fed’s containment efforts, we will likely see interest rates increase further. This will directly impact mortgage rates and contribute to the reality among homebuyers and sellers that we are nearing a peak in house prices. In such a market, residential real estate will continue to offer challenges for investors and servicers who can deploy professional asset management capabilities and skilled experience

Acquisitions & Dispositions

Are High Prices and Low Inventory Changing the SFR Market?

by Rebecca Smith It is fair to say that never has a New Year been so anticipated or so welcomed. 2020 was unprecedented and challenging for almost everyone. The coronavirus threatened the health of millions of people and economies around the world. In our industry, the market for single family rentals (SFR) was buffeted by changing preferences and grim market realities. That did not put a halt on activity. On the contrary, low rates and available liquidity meant a very active year in SFRs for owners and lenders alike. Not only did the market see a record-breaking number of securitizations completed during the year, but it also saw the largest securitization ever to come to market—more than 14,000 assets—successfully close in 2020. REIT Performance SFR Real Estate Investment Trusts (REITs) have been one of the top-performing real estate sectors throughout the pandemic. This was due to several merging factors and secular trends, including the migration of the millennial generation, the largest age cohort in American history, out of cities. These factors are putting enormous pressure on the market and changing the way some industry players are pursuing acquisitions in what looks to be a period of dwindling opportunities. Across the country, inventories are low, and prices are high, as existing homeowners stay put to ride out the pandemic and urban renters move to the suburbs to rent or purchase homes themselves. Adding to the pressure, U.S. private equity real estate funds are sitting on more than $150 billion of unspent cash according to Green Street, a real estate advisory firm, as reported in The Wall Street Journal. With core holdings such as hotels and office buildings having uncertain prospects, fund managers are increasingly looking to single-family homes for growth. The Operators So, how are these pressures affecting operators? Some are changing up their buy boxes and exploring new markets.  The challenge of acquiring in the current market remains in terms of increased prices and low inventory. However, “self-made” challenges to growth strategies are adding to the pressure. With the eagerness to securitize at the current rates, many of the larger aggregators have exhausted their current inventory which has also led to a scramble to acquire new inventory in bulk through M&A activity.  With so much money chasing limited SFR opportunities, something needs to give.  We are seeing that play out among mid-sized operators. Because of a severe lack of inventory, these industry players are turning to each other for growth to increase acquisitions, grow portfolios, and eventually securitize. In October, for example, real estate manager Pretium Partners LLC and Ares Management announced a $2.4 billion investment to acquire and take private Front Yard Residential Corp. In other cases, mid-size operators are leaning heavily on portfolio acquisitions from smaller operators and competitors to achieve their growth targets. Some of the larger institutional players are overcoming the inventory shortage by creating it themselves. In the Las Vegas area, one of the biggest landlords, American Homes 4 Rent, built two rental projects totaling more than 65 houses in 2020 and is planning more this year. And that follows a similar pattern of build to rent properties across the country. The industry is watching closely to see what happens to available inventories when COVID-related foreclosure and eviction moratoriums are lifted as expected early this year. However, with more homeowners having greater equity after a year of explosive appreciation and the sheer volume of forbearances in effect, the potential for further market gyrations is unknown. Regardless of what happens this year, 2020 marked the maturation of single-family rentals into a recognized and highly valued asset class. That may be the one constant in a highly dynamic market. 

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