Among the ideas surfacing as the government works on interest rate and housing policy interventions aimed at bolstering the economy is a plan for financing bulk REO sales for renting to private investors that could be structured in a manner similar to the Term ABS Loan Facility (TALF)/Public-Private Investment Program (PPIP), an approach some securities analysts said recently they are favoring.
This could be helpful in attracting private capital to REO the way TALF/PPIP was used to attract private capital to distressed securities, Credit Suisse researchers said in a recent conference call.
Dale Westhoff, global head of structured products research at Credit Suisse, said a program like this targeting the housing market could prove more effective than rate-based programs.
Given persistent unemployment and negative equity woes, if there ever was a time for policy to be supportive of housing now is it, he said. It's critical to focus on stabilizing home prices, Westhoff said.
Individual investors involved in all-cash transactions have been playing an important role in this market and a program that offers levered financing, among other things, could open it up further to institutional investors.
According to data compiled by Credit Suisse, 30% of transactions in the distressed market are cash sales and overall demand remains weak. Its data peg the average distressed discount at 32% as of June, compared to 28% at the end of 2010. It is essential and important to provide leverage to help bolster the REO market, said Chandrajit Bhattacharya, director, head of nonagency RMBS and ABS strategy at Credit Suisse.
Forty-one percent of distressed sales in 2011 have been from the government-sponsored enterprises, according to Credit Suisse. This program could help with the concern that the GSE share of that market is relatively high, he said.
There are some concerns about how bulk REO sales could affect market prices but Bhattacharya said the program could be structured to address these concerns. The private investors who buy the REO properties in bulk from the GSEs to rent out with the option to buy could have a minimum three- to five-year holding period, addressing the concern that it would add immediate future supply to the market, Credit Suisse noted.
When asked about the nonagency, securitized market, Bhattacharya said a lot of uncertainties remain both in terms of home prices and regulation, with the former making it challenging to price securities. Home price stabilization could help this market, he said.
When asked if the recent SEC REIT proposal raises questions about the government's view of leverage, Credit Suisse managing director and head of MBS strategy, Mahesh Swaminathan, said a leverage cap could be used to address this concern. He added that he thinks the government is unlikely to make a move any time soon that would affect REITs' ability to participate in and support the housing market.
When asked what types of investors would participate under the proposed REO program and how the management of the properties would be handled, Bhattacharya said if the government were to provide leverage it would be essential that large investors would be involved. The government's interaction would probably be limited to large institutions, he added. Property management would have to be done through independent third parties, Bhattacharya said. The researchers indicated that based on the feedback they have gotten so far they believe there are operators who could manage somewhat large portfolios of single-family homes involved, although this has not been done before to the scale proposed by the program.
Westhoff said there could be certain local markets the program might not work for due to differences in rental demand, but it should work for a significant number of markets.