Sep 07, 2011
Morgan Stanley has a plan for distressed properties
07 Sep 2011
Posted by Andrew Kantor
Morgan Stanley is really pushing it’s plan — called REBUILD (I’m sure it stands for something cute, but honestly I don’t think it matters) — where investors would buy big blocks of distressed homes, fix ‘em up, and rent ‘em. With something like six million such properties (either in or nearing foreclosure), that’s a lot to work with.
“We believe this framework for a solution would benefit all stakeholders at the expense of none, while being fair and sensitive to the hardships faced by all Americans,” said the company. And if you can’t trust a large global financial services firm, who can you trust?
The idea is that organizations with a large stack of REOs — the housing agencies (e.g., Fannie, Freddie, and FHA) and lenders — would agree to sell those properties in bulk to investors.
That would give the investors a better deal on prices, and in return they would agree to rehabilitate the homes, and — if there’s an existing homeowner in distress — to offer a “deed for lease” option. (Another possibility would have the investors offer “rent to buy” alternatives.)
In theory, the plan would allow distressed homeowners to remain in their homes, absorb some of the ever-growing mountain of REOs, and help neighborhoods by turning vacant homes into (well-maintained) rental property.
Of course, all this is theory. Investors will want tax breaks and some kind of public-backed “lending platform” to help finance them; to protect taxpayers, the loans would have “strict loan-to-value limits and include only already income-generating properties.”
Which brings up one concern. Include only already income-generating properties. Would that mean the program could ignore some of the hardest-hit areas, or lower-income neighborhoods where the need is greatest but the potential income is lowest?
Another concern: By backing these investors, even with those strict loan-to-value limits, Fannie/Freddie/FHA would simply be adding to their already swollen balance sheets.
Morgan Staney said, essentially, ‘Oh, don’t worry about that’:
[I]instead of focusing on what we don’t want, we think it’s better to focus on what we do want, and figure out a way to reach those goals.
“In this case, we believe that the goal should be effective ownership and management of rental properties, while retaining some upside for taxpayers if everything works out and home prices recover.”
(Update: REBUILD does stand for something — “REdevelopment, Bulk sales, Incentive programs, Lending facilities, and Diligent oversight.”)