[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]




 
                     AN EXAMINATION OF THE FEDERAL
                     HOUSING FINANCE AGENCY'S REAL
                    ESTATE OWNED (REO) PILOT PROGRAM

=======================================================================

                             FIELD HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND

                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 7, 2012

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-120


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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

           James H. Clinger, Staff Director and Chief Counsel
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

DAVID SCHWEIKERT, Arizona, Vice      MAXINE WATERS, California, Ranking 
    Chairman                             Member
PETER T. KING, New York              GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             RUBEN HINOJOSA, Texas
DONALD A. MANZULLO, Illinois         STEPHEN F. LYNCH, Massachusetts
JUDY BIGGERT, Illinois               BRAD MILLER, North Carolina
JEB HENSARLING, Texas                CAROLYN B. MALONEY, New York
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin
JOHN CAMPBELL, California            ED PERLMUTTER, Colorado
THADDEUS G. McCOTTER, Michigan       JOE DONNELLY, Indiana
KEVIN McCARTHY, California           ANDRE CARSON, Indiana
STEVAN PEARCE, New Mexico            JAMES A. HIMES, Connecticut
BILL POSEY, Florida                  GARY C. PETERS, Michigan
MICHAEL G. FITZPATRICK,              AL GREEN, Texas
    Pennsylvania                     KEITH ELLISON, Minnesota
NAN A. S. HAYWORTH, New York
ROBERT HURT, Virginia
MICHAEL G. GRIMM, New York
STEVE STIVERS, Ohio
ROBERT J. DOLD, Illinois


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 7, 2012..................................................     1
Appendix:
    May 7, 2012..................................................    43

                               WITNESSES
                          Monday, May 7, 2012

Burns, Meg, Senior Associate Director, Housing and Regulatory 
  Policy, Federal Housing Finance Agency (FHFA)..................     5
Dobson, Sean, Chief Executive Officer, Amherst Holdings..........    24
Grossinger, Rob, Vice President, Community Revitalization, 
  Enterprise Community Partners, Inc.............................    26
Kenney, Mary R., Executive Director, Illinois Housing Development 
  Authority (IHDA)...............................................    28
Pruess, Dick, on behalf of Community Associations Institute (CAI)    31
Stegman, Michael, Counselor to the Secretary of the Treasury for 
  Housing Finance Policy, U.S. Department of the Treasury........     6

                                APPENDIX

Prepared statements:
    Burns, Meg...................................................    44
    Dobson, Sean.................................................    50
    Grossinger, Rob..............................................    58
    Kenney, Mary R...............................................    68
    Pruess, Dick.................................................    80
    Stegman, Michael.............................................   103


                     AN EXAMINATION OF THE FEDERAL
                     HOUSING FINANCE AGENCY'S REAL
                    ESTATE OWNED (REO) PILOT PROGRAM

                              ----------                              


                          Monday, May 7, 2012

             U.S. House of Representatives,
                Subcommittee on Capital Markets and
                  Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 8:38 a.m., in 
room 2525 of the Everett M. Dirksen U.S. Courthouse, 219 South 
Dearborn Street, Chicago, Illinois, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett and Schweikert.
    Also present: Representatives Huizenga and Schilling.
    Chairman Garrett. Good morning, and welcome. Today's field 
hearing of the Subcommittee on Capital Markets and Government 
Sponsored Enterprises, on the examination of the Federal 
Housing Finance Agency's Real Estate Owned (REO) Pilot Program, 
is called to order. I welcome my colleagues and members of the 
first panel, and management members of the subsequent panels, 
as well.
    I will begin by recognizing myself for an opening 
statement. Welcome, everyone. I appreciate the fact that a 
number of you, myself included, had a difficult time getting 
here to Chicago on this beautiful day. I guess this is a 
beautiful day for Chicago. I appreciate that. That's just what 
I hear about the weather in Chicago.
    Mr. Huizenga. It's not raining enough.
    Chairman Garrett. I appreciate everyone traveling so far. 
We're just now coming up on, just a couple of months from now, 
I guess, the fourth anniversary of the two GSEs, Government 
Sponsored Enterprises, Fannie Mae and Freddie Mac, being put 
into conservatorship.
    As we approach this significant deadline, we recognize that 
it has been done with a cost, the ongoing balance upwards of 
$180 billion, and that number, of course, is expected to grow 
significantly over the next several years. Currently, the 
American taxpayer is footing, obviously, the bill for all this, 
and they're also doing so while backing over 90 percent of the 
mortgage market right now. Put those two statistics together 
and it's undeniable that this is an unsustainable situation in 
which we find ourselves.
    And so, it is fitting and it's appropriate that we come 
here for a hearing such as this, to try and figure out how we 
go forward in trying to take the American taxpayer off the 
hook, in part by reducing the risk and the burdens of the GSEs, 
and also by reducing the assets that they have, and to figure 
out, also, how we can wind these entities down.
    This is not just a message that we have, but also a message 
that the Administration has communicated they would like to 
see, as well. So, the purpose of today's hearing is to further 
examine the FHFA and their REO program, Real Estate Owned 
program. And it's a pilot program they have, that began last 
year. What is it designed to do? It's designed to determine the 
best ways, if you can, to come up with, to do this not just in 
the pilot program--they're just doing a small program--but to 
do it in a much larger program, bulk sales. And you're selling 
these not just to regular investors, but to rather significant 
investors who will then take those assets and manage them and 
service the properties and then rent them out to local 
residents. From looking into this and from talking to people 
involved with this, this is not a simple matter all by itself; 
it's a fairly complicated procedure. There are going to be many 
questions and I'm glad that we have the witnesses here on the 
panel today who have a background in this. We'll probably go 
into some detail with you on some questions.
    You run through the list and it's a ``who, what, when, 
where, and how'' sort of list of questions. The first one, I 
guess, is the ``who,'' and that is the investors. Who are the 
investors, what is the level of interest that they have in 
these new, sort of, asset classes?
    The ``what'' is the standards that we're going to be using. 
What are the standards that we should be applying to the 
``who,'' the investors, in order to become an eligible buyer in 
this marketplace?
    The ``how'' is how you maximize the value of the property 
and receive market value when you're selling in bulk. See, I'm 
just throwing these out on a large scale and not getting a fair 
return to the GSEs. ``How'' also is how are all of these 
assets, all of these properties, going to be managed over time 
to make sure that they're appropriately managed?
    Going back to the ``what,'' what role does the government 
put by community groups, the nonprofit groups, in the local 
areas of play, depending on these areas?
    And, again, the ``how,'' how can private institutions that 
have REO portfolios use this as a potential model that's out 
there? We would have to look at them and say, that's the way we 
should be handling this, that's the way we can deal with it. 
So, that's a few of the questions, and my colleagues are going 
to have a lot more questions than that. I look forward to 
learning the answer to these and many more.
    As I said, I have talked to folks who were involved in 
this, in similar-type programs. They do offer significant 
potential, but they also offer potential risk, as well. And so, 
it's critical that we do it, but it's critical that we get it 
right. There is, obviously, a significant amount of inventory, 
in the shadow inventory that currently exists. But we want to 
make sure that we do it in a way that maximizes the return, if 
you will, to the taxpayer.
    I'm hopeful that an efficient, cost-effective strategy or 
disposition of the property can decrease the risk of these 
entities, maximize the value for the taxpayers, and help the 
housing market in these hardest-hit areas that we're examining.
    One other thing, is that I just wanted to thank Congressman 
Bob Dold for his work: first, for facilitating the hearing that 
we're having here today; and second, for the lead that he has 
taken in this important area, and for the hard work that he has 
put into the whole general area of housing and what we can do 
in the housing markets. He has been a significant contributor 
to this topic for myself and this committee. As you may know, 
since he is playing all those roles, he was going to be with us 
here today, but unfortunately, very sadly, he has recently had 
a death in his family and so was not able to be with us. But we 
will continue to look forward to his involvement as this issue 
proceeds.
    One last note, and that is to Director DeMarco, since we're 
on the record, and I have said this before, I would just like 
to commend him for his work and his achievements in this area 
and other areas over there at the FHFA. I know he comes under 
significant pressure on both policy and politics, and I think 
he has done a very outstanding job in the role that he has; it 
is a very difficult role that he has. He did not succumb to 
those political pressures, but instead realized that he has to, 
and has, lived up to his requirements, the statutory 
requirements and what is in the law, and that is to stand 
between those pressures and the American taxpayer, who would be 
on the risk otherwise, if he was not doing the fine job that he 
is doing. So, carry that message back, if you would.
    With that, I yield back my time, and just at the opportune 
time, I will yield to Mr. Schilling. Thank you for joining us.
    Mr. Schilling. You bet. It's an honor to be here. I'm sorry 
I was running a few minutes late; I got caught downtown. I am 
looking forward to hearing from you folks and then asking some 
questions. So, thank you for allowing me to participate.
    Chairman Garrett. I now recognize Mr. Huizenga.
    Mr. Huizenga. I'm Bill Huizenga from Michigan; leave it to 
the Michigan guy to always carry a map. My district is over on 
the west side of the State, and hopefully a number of my 
Chicago friends here will come and visit us on the west side of 
Michigan as often as my wife and I come down and enjoy Chicago.
    This topic is very much of interest to me. My professional 
life prior to being involved in politics was in real estate 
developing. My family has a small construction company over in 
Michigan. And any time we're talking housing, it has 
ramifications and impacts for, frankly, everyone around the 
county. I, too, am very interested in seeing how we are going 
to unwind some of these things.
    I often have brought up that in my time, starting in the 
late 1980s and early 1990s in real estate, getting an FHA loan 
or a Fannie Mae or Freddie Mac loan was fairly unusual. It was 
quite unusual, in fact, in our area. You needed to own your lot 
or you needed to have 20 percent down. And 20 percent became 
15, became 10, became 5, became 0, became 120 percent loan to 
value, and here we are. We found ourselves in some situations 
that, on one hand, we haven't been able to control, and on the 
other hand, there have definitely been inputs from us as 
policymakers and things that have happened in the past that 
have influenced and affected that. And I'm here to help try to 
figure that out.
    As the chairman was saying--and I want to commend Chairman 
Garrett for his leadership on this and many other issues--we 
are looking at how we are going to make sure that while we are 
transitioning back away from the current roles that we have, 
how we're going to do this in a way that makes sense and 
doesn't do further harm. And we have sort of a political 
Hippocratic Oath here, ``First, do no harm,'' to which we need 
to adhere.
    So, with that, I yield back, Mr. Chairman, and I thank you 
for the opportunity to be here today.
    Chairman Garrett. And I appreciate you being here, as well. 
Before I yield to the gentleman from Arizona, I would like to 
take this time to thank the Judge for facilitating the use of 
this courtroom. My first job out of law school was as a clerk 
to a U.S. Magistrate, and I learned those guys are very 
protective of their courtroom. And rightfully so. So, it's a 
privilege and an honor to be able to be here, and to have the 
use of the courtroom, as well. We're all very much appreciative 
of that.
    And with that, I yield to the gentleman from Arizona.
    Mr. Schweikert. Ms. Burns, in your testimony--please 
understand, I may be one of the more aggressive Members of 
Congress on this particular subject. I look at what's going on 
in my market area, which is Maricopa County, Arizona, one of 
the largest counties in the United States. And you're going to 
hear me say this 2 or 3 times: If you go to our multiple 
listing service, we have less than a 5-week supply of homes 
$250,000 or less. There's demand and hunger, but yet our REO 
pipelines are inefficient and aren't working. And I appreciate 
wanting to do a pilot program, but the size of this pilot 
program is heartbreaking. It does not put out enough product to 
do, I believe, true price discovery.
    Hopefully, you're seeing that with folks who are becoming 
qualified bidders. If you truly have 200, 300, 400, or 500 
qualified bidders, you understand you have a demand out there. 
I am very happy that, from what I'm picking up, you are going 
to do different sized packages to find the price discovery. And 
when we get to questioning, I want to walk through some of 
those mechanics there. But, in your testimony, and this may be 
outside your written area, share with us when you're going to 
loosen up this pipeline.
    There are 2,500 properties, and you're sitting on a couple 
hundred thousand, and there are at least that many more in the 
pipeline. This does not satiate your problem or the demand on 
the other side. Thank you, Mr. Chairman.
    Chairman Garrett. And now, we'll turn to our first panel. 
We have Ms. Burns and Mr. Stegman with us today. Ms. Burns is 
the Senior Associate Director for Housing and Regulatory Policy 
at FHFA, and Mr. Stegman is Counselor to the Secretary of the 
Treasury for Housing Finance Policy at the U.S. Department of 
the Treasury.
    We will begin with you, Ms. Burns. And we welcome you with 
all of your trials and tribulations that you had to get here. 
As always, your full statement will be made a part of the 
record, and we will recognize you for 5 minutes to give an oral 
summary. Thank you.

STATEMENT OF MEG BURNS, SENIOR ASSOCIATE DIRECTOR, HOUSING AND 
    REGULATORY POLICY, FEDERAL HOUSING FINANCE AGENCY (FHFA)

    Ms. Burns. Chairman Garrett and members of the 
subcommittee, thank you for inviting me here today to testify 
on the Federal Housing Finance Agency's Real Estate Owned 
Initiative. I am Meg Burns, Senior Associate Director for the 
Office of Housing and Regulatory Policy at FHFA and I am 
responsible for managing this project.
    As you know, since 2008 FHFA has served as the conservator 
to Fannie Mae and Freddie Mac, a responsibility that the Agency 
takes very seriously. FHFA has focused on minimizing losses to 
both companies through tighter underwriting standards, more 
accurate pricing of risk, and aggressive loss mitigation 
strategies.
    My remarks today will focus on a particular loss mitigation 
effort, the REO-to-Rental pilot, which was designed to test a 
new approach to property disposition. The goals of this pilot 
are narrowly targeted.
    One, to gauge investor appetite for a new asset class, that 
is scattered-site, single-family rental housing.
    Two, to determine whether the disposition of properties in 
bulk, as opposed to one by one, presents an opportunity for 
well-capitalized investors to partner with local organizations 
to engage in profitable yet civic-minded approaches to improve 
market conditions.
    Three, to assess whether the model can be replicated by 
other financial institutions.
    Now, for the status of the pilot. We are well into the 
first transaction, announced in February. Included in the first 
sale are approximately 2,500 properties divided into 8 
subpools, located in Las Vegas, Nevada; Phoenix, Arizona; 
various parts of Florida; Riverside and Los Angeles, 
California; Atlanta, Georgia; and here in Chicago, Illinois. 
There are several steps to the process: prequalification; due 
diligence; qualification; bidding; and award. We are now at the 
qualification stage.
    Immediately following the February announcement, interested 
investors were asked to prequalify by certifying to their 
financial capacity, market experience, and obligation to follow 
the transaction rules. Those who prequalified were then 
eligible to post a security deposit to review detailed asset 
level information, and to submit an application to qualify to 
participate in the auction. Evaluation of those applications is 
now under way.
    The application process is comprehensive, rigorous, and 
demanding, requiring exhaustive amounts of information and 
documentation from the applicants and their business partners. 
Only those investors who have sufficient capital and 
operational expertise will make it past the scrutiny of the 
reviewers. The application requires that the investors describe 
their previous experience managing single-family rental assets 
from marketing to leasing to maintenance. How relevant, 
extensive, and recent that experience was will matter in the 
scoring.
    In addition, the applicants must detail their plans for 
operating a first-rate rental program with these particular 
properties. They must explain how they would rely on local and 
regional organizations to tailor their programs to meet the 
needs of residents in these communities. There is an 
expectation that local construction and repair companies will 
be engaged due to their familiarity with State and local 
building codes, that local property management firms will bring 
knowledge of potential tenant population in the area and the 
best means of marketing to these citizens, and that community-
based nonprofits may provide supportive services to the 
residents.
    This rigorous application process is intended to narrow the 
pool of eligible bidders to those who have financial and 
operational expertise, but also the mission-oriented commitment 
to ensure that this program brings capital to markets in need 
in a way that stabilizes communities.
    Currently, the independent third party that was hired to 
review the applications is busy rating and scoring, a process 
that will be completed in the next few weeks. After that, 
eligible bidders will be notified and the bid process will 
begin. FHFA's goal is to complete this first pilot transaction 
in the next few months.
    To recap, the REO-to-Rental Initiative is a pilot, a test 
to see whether an alternative disposition strategy can 
complement existing sales efforts, generating private 
investment in single-family rental housing in a way that is 
both efficient and effective at stabilizing local markets.
    I thank you for the opportunity to testify today, and I 
look forward to your questions.
    [The prepared statement of Ms. Burns can be found on page 
44 of the appendix.]
    Chairman Garrett. Thank you.
    Next, Mr. Michael Stegman, Counselor to the Secretary for 
Housing Finance Policy. Thank you.

STATEMENT OF MICHAEL STEGMAN, COUNSELOR TO THE SECRETARY OF THE 
  TREASURY FOR HOUSING FINANCE POLICY, U.S. DEPARTMENT OF THE 
                            TREASURY

    Mr. Stegman. Thank you, Chairman Garrett, and members of 
the subcommittee. Thank you for the opportunity to testify this 
morning.
    Prior to joining the Department of the Treasury as 
Counselor to Secretary Geithner for Housing Finance Policy 4 
months ago, I worked on housing policy in various capacities 
over the course of a long career. Most recently, I was the 
director of policy and housing at the John D. and Catherine T. 
MacArthur Foundation headquartered here in Chicago. Before 
that, I spent much of my career as a professor of city planning 
and public policy at the University of North Carolina at Chapel 
Hill. During my 40-year tenure at UNC, I twice took leave to 
serve in the Carter and Clinton Administrations as a senior 
official at the U.S. Department of Housing and Urban 
Development.
    Throughout my professional life, I have been involved with 
housing and community development policies, and with broadening 
access to safe, sustainable mortgage credit. I have come to 
understand the importance of safe and secure neighborhoods and 
stable communities to social and economic advancement.
    While at the MacArthur Foundation, we invested millions of 
dollars to help revitalize and improve the quality of life at a 
large number of low-income neighborhoods right here in Chicago, 
communities that are now hard hit by foreclosures and the 
intended loss of wealth through the collapse of housing crisis. 
While among the hardest-hit communities, Chicago's 
circumstances are repeated to varying degrees in communities 
across the country, which is why it is so important to do all 
that we can to help financially distressed families keep their 
homes, and work to reduce the damage that foreclosures do to 
families, neighborhoods, and local housing markets.
    And so, I thank you for holding this hearing to discuss the 
FHFA, Fannie Mae, Real Estate Owned Initiative. While my 
written testimony places this pilot within broader 
Administration efforts to help heal the housing market, I will 
focus my remarks just on the pilot and REO-to-Rental.
    We believe that scale initiatives like this have the 
potential and the underscore potential to achieve five 
beneficial outcomes.
    First, they can attract private investment back to some of 
the hardest-hit neighborhoods where there is weak homeownership 
demand.
    Second, by removing a significant number of REO homes from 
the for-sale market, successful REO-to-Rental efforts help 
stabilize local housing prices, thereby benefiting existing 
homeowners and performing loans.
    Third, by creating new rental opportunities for former 
homeowners and others not interested or able to buy a home. 
These programs have the potential to reduce inflationary 
pressures in the rental market caused by the surge in rental 
demand.
    Fourth, carefully executed REO bulk sales can complement 
neighborhood stabilization activities through private 
investment and acquisition rehab and responsible maintenance of 
hard-to-market properties for which there is little ownership 
demand.
    And, finally, this disposition strategy may provide 
financial institutions, including the Government Sponsored 
Enterprises in the case of the FHFA pilot, a potentially cost-
effective alternative channel to sell foreclosed properties in 
scale and in ways that compete favorably, but they're all in 
costs associated with runoff retail sales.
    However, as the chairman and others on the subcommittee 
noted, perfecting a business model that would convert these 
potential benefits into on-the-ground results will need to come 
easily or quickly. Investors and their partners must be 
properly equipped to deal with the challenges associated with 
developing the necessary infrastructure that will enable them 
to cost-effectively rehabilitate, maintain, and successfully 
market and manage dispersed single-family properties in places 
that have had, in some cases, bad experiences with nonresident 
investors and absentee owners. It may well be that the ability 
of these emerging businesses will effectively address community 
relations and become good neighborhood citizens, will help 
ultimately determine that financial success and the quality of 
outcomes for families and housing markets. With respect to the 
FHFA pilot, to achieve good outcomes Fannie Mae must get more 
than just a good price for its eight sub portfolios. This is 
why we're very pleased with the high standards that Fannie and 
FHFA set for investors interested in becoming qualified bidders 
in the auction. Investors must be responsible and responsive 
property owners committing to investing for the long term.
    I'll highlight just three important requirements of the 
qualification and bidding process. First, investors who lack 
experience and expertise to successfully manage large-met 
numbers of scattered-site properties, who don't have experience 
in the communities in which the portfolios are located, or who 
have a history of behavior that could lead to bad results, as 
Ms. Burns said, will not be eligible to participate. Qualified 
bidders must agree to provide tenants, out of its own funds, 
housing counseling and credit repair services, and to provide 
credit bureaus necessary documentation of tenants' rent, timely 
rent payments, to help boost their credit scores.
    Second, effective operating guidelines and compliance and 
reporting requirements will be part of the contractual 
agreement between the Enterprise and the investors. We are 
mindful that this pilot is a transaction between a private 
seller and private investors, and not a government program. But 
nevertheless, it is in the interest of the Enterprises, and 
FHFA, and the taxpayers that properties be well-maintained and 
the commitments made by winning bidders will be kept.
    Finally, requiring a minimum of 3 years of rental occupancy 
before the majority of homes can be sold is critical to 
achieving market stabilization goals and attracting capital 
sources, management expertise, and investors with longer-term 
investment horizons that FHFA is seeking from its successful 
bidders.
    Ultimately, we hope that if this pilot is successful it can 
serve as a model for private market participants. Investors 
from across the country may read--and here--are actively 
pooling capital as a sign of increased interest in this kind of 
business model. And lenders are beginning to develop products 
to provide investors with the necessary financing to invest in 
this space. We have heard anecdotally that the private sector 
is looking to Fannie Mae's initial pilot as a model, in the 
same way that mortgage servicers relied on HAMP when developing 
their proprietary loan modifications. We hope that many of the 
same investor standards and usage restrictions in the pilot 
will be replicated so that communities are properly protected, 
tenants are effectively served, and investors can be 
appropriately rewarded for doing the right thing.
    In closing, I want to note that we're also encouraged that 
a number of financial institutions are beginning to develop 
alternatives to foreclosures, such as deed-for-lease, deeds-in-
lieu, and short sales programs, as well as selling 
nonperforming loans to help families who can no longer support 
ownership. These initiatives are beneficial to the affected 
families, help keep REO assets from growing and properties from 
deteriorating. And they complement an REO-to-rental strategy. 
Treasury's Home Affordable Foreclosure Alternative Programs set 
a new standard for short sale and deed-in-lieu execution by 
promoting pre-approved short sale transactions, requiring that 
borrowers with a genuine hardship will be released from 
liability for the remaining mortgage debt upon sale, and 
established a reasonable industry standard for payments to 
extinguish junior liens. The FHFA is also providing important 
leadership in this area by directing the GSEs to develop 
enhanced and aligned strategies for facilitating foreclosure 
alternatives.
    Thank you again for inviting me to testify and I look 
forward to any questions you may have.
    [The prepared statement of Mr. Stegman can be found on page 
103 of the appendix.]
    Chairman Garrett. Mr. Stegman, thank you; and Ms. Burns, as 
well. I now yield myself 5 minutes for questioning.
    Mr. Schweikert. You can have all the time you want.
    Chairman Garrett. No, I don't do it like that. Ms. Burns, 
Mr. Stegman was just talking during his time with regard to 
nonprofits and the like. Can you spend a little bit of time and 
delve into that? What are your plans on looking at this? Is 
this an avenue that you intend to go down?
    Ms. Burns. Sure, absolutely. When we entered into this 
whole effort, working with several other agencies, we were very 
concerned about partnering up the investors who may be 
interested in the bulk sales with local organizations who are 
already engaged in efforts, maybe in part because of the 
Neighborhood Stabilization Program funds that were put forward, 
maybe because there were already efforts in local communities. 
We brought in a number of large, sophisticated national 
nonprofits to talk to us, to advise us on how to facilitate the 
kinds of partnerships that we're looking for. And interestingly 
enough, one of the things that they said very adamantly was 
that they did not think that FHFA should impose a mandate that 
the investors partner with nonprofits, that if it were 
mandatory, the investors would potentially partner up with less 
sophisticated nonprofits which would come to the partnership, 
maybe at a lower cost, those with less capacity, who would 
maybe not add the value that some of the larger, more 
sophisticated nonprofits could add.
    They were concerned, also, that perhaps sham nonprofit 
arrangements would spring up. And we were very sensitive to 
what they were saying, and so what we decided based on all of 
their good advice was that in the application we would mandate 
that the investors partner with local organizations which 
brought the kind of expertise that was necessary to this 
project. The operational expertise and the value added would 
come from sort of natural organic partnerships as opposed to 
mandatory government-imposed requirements.
    Chairman Garrett. Okay, I appreciate that. So, dovetail 
that into my next question, which concerns the pros and the 
cons of doing what you're going to do, or hopefully going to 
do, which is bulk sale as opposed to individual sale. Talk 
about the pros and cons briefly.
    Ms. Burns. Okay.
    Chairman Garrett. And then, is there an element to the 
nonprofit at that point, as well?
    Ms. Burns. Yes, absolutely. Today, there are sales to 
investors that take place, generally one by one. There are some 
small bulk sales of lower valued properties that take place. 
One of the concerns we have is that with the retail sales, the 
investors often are coming in with cash, which is requiring 
properties to be discounted below where we would like to see 
them discounted. And as Mr. Schweikert had said previously, 
it's not really getting at the more local problem when there 
are large numbers of REOs in certain markets. This effort, the 
bulk sales effort, really is intended to bring in a different 
investor class, to bring in the large investors, institutional 
investors, REITs, who really focus on real estate investment, 
and to figure out how they can bring new private capital into 
markets and tie it up with operational expertise at the local 
level. We had heard that if we could arrange for bulk sales, 
the investors then could begin putting money into the 
infrastructure. As Mr. Stegman said previously, that's one of 
the biggest issues, that's one of the biggest challenges with 
this project, trying to help create infrastructure at the local 
level to make this kind of project work. And so, the bulk sales 
approach provides the opportunity for the money to come in, 
investing in infrastructure.
    Chairman Garrett. My final question: you laid out all that 
stuff, can you give us briefly, assuming this all works great, 
then what?
    Ms. Burns. If this works great, then we will certainly be 
engaged in many more transactions. I think this first 
transaction, really what we need to see is, where will these 
assets price? How will the types of assets, size of the pools, 
the markets affect the pricing? How will the restrictions that 
we put in place affect the pricing? How will the mandate that 
the institutional investors work with, local organizations, 
affect the pricing? And so, we'll have to see how that all 
plays out together and learn some lessons from these 
transactions and determine whether or not we need to change the 
nature of the pools going forward and make a decision about 
what the transactions will look like in the future.
    Chairman Garrett. Great, thanks. I now recognize Mr. 
Schilling for 5 minutes for questions.
    Mr. Schilling. Thank you, Mr. Chairman. I should have 
mentioned earlier, actually, I ran from the Quad Cities, home 
of the John Deere tractor, representing the 17th District of 
Illinois. So, first I just want to say thank you for coming 
out. One of the things that I want to talk a little bit about 
is the bulk sales, and how those are determined. Because one of 
my fears, especially when we're doing one of these trials, is 
that what will happen is these investors will come in and they 
will pick up the cream of the crop of the housing that's 
available, making this look better than it is. So, can you kind 
of tell me how that's going to--is it going to be a mix of 
cream of the crops with some of the housing that needs more 
work, or--
    Ms. Burns. The initial pools right now, the investor must 
buy all of the properties in the pool. So they can't pick and 
choose, they can't cream from those specific pools. There are 
eight subpools, so they can buy one pool, or all pools, or 
several pools, but they must buy everything in the pool. The 
properties that are in these pools are mainly already rented 
properties, and we did that intentionally because we were 
concerned that in this first transaction, we wouldn't know how 
long it was going to take to sort of execute from start to 
finish, and we didn't want vacant properties sitting on the 
market for an extended period of time. So, these properties--
or, so these pools are composed of, I would say, sort of 
moderately priced homes--they're not in very poor condition, 
and they're not premier properties. They're sort of middle-of-
the-road properties.
    Mr. Schilling. Very good, so you can put some sweat equity 
into them and make things happen. Either one of you can answer 
this one. Your testimony basically states that the Enterprise 
currently had about 180,000 REOs. Do you know how many REO 
properties the FHA currently has?
    Mr. Stegman. I don't. Ms. Burns may know.
    Ms. Burns. No, I don't know. I think it's in the 50,000 
range, but we can certainly find out for you.
    Mr. Schilling. Okay. Also, the testimony states that the 
Enterprises currently own or guarantee approximately 1.3 
million nonperforming loans, the majority of which are more 
than a year delinquent. Do you have an estimate of how many of 
these loans you expect to eventually become REO properties?
    Ms. Burns. We don't have an estimate of how many will 
become REO properties, in large part because we are hoping to 
engage in other loss mitigation strategies to prevent that from 
happening, to tell you the truth. We really would like to 
either get the borrowers into modification, or if they can't 
stay in their home, liquidate through some sort of a short-
sale-type arrangement, or sell the nonperforming loan to 
another party who can work to resolve the situation.
    Mr. Schilling. Do you have an average cost, roughly, from 
something that we have done already, like for the repairs of 
some of the REO properties?
    Ms. Burns. I could bring that back to you. We do have all 
those numbers. I could bring them back; I don't have that off 
the top of my head.
    Mr. Schilling. That's fine.
    Ms. Burns. And some properties don't get repaired at all, 
some of them are in fairly decent condition when you come into 
Fannie Mae and Freddie Macs, that don't perform any repairs. 
But, we can find the average cost.
    Mr. Schilling. Yes. And I appreciate what you folks are 
trying to do. Because what we are trying to do is, of course, 
put a floor onto the real estate market to where we can stop it 
from--but, of course, a lot of times what we see happen is 
unintended consequences when it comes to some things that we 
try to have good intentions with.
    But with that, I yield back.
    Chairman Garrett. Thank you. The gentleman yields back. I 
recognize Mr. Huizenga for 5 minutes.
    Mr. Huizenga. I appreciate that, Mr. Chairman. And thank 
you for your testimony. I just want to make sure I understand. 
You were talking about the eight pools that these properties 
are brought into. And, again, I just want to make sure I'm 
clear on this. So, geographically, we're talking Atlanta, 
Chicago, Florida, Las Vegas, Los Angeles, and Phoenix. Which is 
six, but then Florida is broken up into three areas, so it 
would be--so, each of those pools would be a Los Angeles or a 
Phoenix or a Las Vegas, or some particular area in Florida; is 
that correct?
    Ms. Burns. That is correct.
    Mr. Huizenga. Okay. Now, obviously, if we're targeting 
REITs as potential purchasers of these--these are not 
unsophisticated investors, or organizations, it would seem to 
me that as Mr. Stegman was talking about, if the goal was to 
stabilize neighborhoods, homeownership is probably one of the 
leading indicators of a stable neighborhood. Which, frankly, 
that goal may have helped it get--helped us get out over our 
skis. And having homeowners who maybe weren't quite ready for 
that ownership. And I'm trying to make sure, though, that I 
understand if we have a large pool somewhere, 50,000 or 60,000 
potential properties; right, is that what we're hearing?
    Ms. Burns. For this kind of arrangement, I doubt you would 
ever have a pool of that size. This first transaction is 2,500 
properties spread across those 8 subpools. And, really, Fannie 
Mae and Freddie Mac both have retail strategies that sell first 
to owner/occupants, as you were saying. And those have been 
very successful. So, we would consider--the retail sales 
execution will continue to be the primary way that they sell 
their REO properties. There's not a sufficient concentration of 
the units to sell them in bulk at those very large volumes, and 
we agree that it's best to first try to get an owner occupant 
into the property.
    Mr. Huizenga. So, we're talking about a fairly small--I 
don't want to--you keep using the word ``pool,'' because we 
have too many pool discussions happening here, on the eight 
various pools. It's a narrow slice of--
    Ms. Burns. That's correct.
    Mr. Huizenga. --eligible properties.
    Ms. Burns. That's correct.
    Mr. Huizenga. I think maybe going to my colleagues' 
concerns here, if we still have a significant number of 
properties, it seems like we're kind of throwing around two 
sides of this. These investment pools are large, therefore, we 
need to have organizations such as REITs coming in and doing 
this professionally. Yet, if we're talking 2,500 divided across 
8 separate pools, and I'm a social science major, not a hard 
science major, but my math would--it's somewhere near 300 homes 
per pool?
    Ms. Burns. Actually, we were testing varying sizes, so the 
smallest pool is approximately 100 properties, and the largest 
pool is approximately 500 properties.
    Mr. Huizenga. Okay. And then do you expect these REITs to 
be coming in and purchasing the entire pool, a slice of the 
pool, how many players are going to come in and deal in that, 
the waters of that 100-home pool versus the 500-hundred-home 
pool?
    Ms. Burns. Right. That's one of the things that we're 
testing. The opportunity is to buy all of the subpools at once, 
to buy--
    Mr. Huizenga. All eight?
    Ms. Burns. All eight. To buy one pool at a time.
    Mr. Huizenga. Does that cause you concern, Mr. Stegman, if 
you're talking about how you need to have a local understanding 
of what's happening? If I'm a California REIT, or a Michigan 
REIT, and maybe I'm a Michigan REIT and I have no connection in 
any of those eight areas, personally, I would not be concerned 
with that, because, again, I think these are sophisticated 
investors that aren't just investing, they are protecting their 
assets, and they know what they're going to be doing. But, does 
that cause you any concern?
    Mr. Stegman. Thank you for that question, it gives me a 
chance to clarify. We're talking about the requirements that 
bidders, whether they bid on all eight or just one, have 
experience or partners who are familiar with and have worked in 
the geographies in which these portfolios are located. And so, 
the source of the dollars, if they come from a REIT that has 
sufficient investment capital to bid and win on all of those, 
the evaluation process, my understanding is, and Ms. Burns can 
correct me if I'm wrong, but they would be evaluated geography 
by geography, sub-portfolio by sub-portfolio, and if they fail 
in one or two, that would really not bring them to a winning 
bid. I think the other point I would make is that the 
composition of these portfolios, you may be in a suburban 
subdivision in one case, and an urban neighborhood in another, 
and the relationships that we're talking about really have to 
be tailored to the locality, and you would expect a 
sophisticated investor to recognize that.
    Mr. Huizenga. I believe my time has expired, but I would 
like to, maybe in another round here, explore exactly whether 
these properties have been identified. Do we know whether they 
are urban or suburban or rural, or where exactly those 
properties lie within these widely disbursed--
    Chairman Garrett. Do you want to just give a quick answer 
to that?
    Ms. Burns. Sure. So, the effort was to find properties that 
were concentrated relatively closely within the markets. But it 
is true that some will be in suburbs and some will be in urban 
areas. I don't think there are any that are in truly rural 
areas, within any of these markets. But there will be sort of 
wide geographies within each subpool.
    Chairman Garrett. Thank you, Ms. Burns.
    The gentleman from Arizona?
    Mr. Schweikert. Thank you, Mr. Chairman. And if I come 
across a bit cranky on this, it's a hazard of the fact that 
this is one of my areas of true expertise. Before getting 
elected, I was the largest buyer of single-family homes in the 
southwest.
    My investment partnerships--my undergraduate is in real 
estate and real estate economics. I chaired the board of 
equalization; I was the county treasurer. This is my life.
    Mr. Stegman, I am very uncomfortable with much of your 
opening statement, on how bureaucratic it sounds. And look, 
first let me paint a scenario from my expertise with Maricopa, 
Arizona, one of the hardest-hit areas, but also one of the 
largest. It's the third or fourth biggest county in the United 
States by population. I can take you through neighborhoods that 
have been devastated by foreclosures and look better today than 
they have in 30 years. Because one, two, three, four, 
foreclosure, investor bought it, new roof; one, two, three, 
four, foreclosure, new family, new landscaping. It has become 
almost an urban renewal because individuals have brought in 
their own capital and fixed up those neighborhoods. And there 
finally is that role of value and fixing up and new lives being 
formed. And this arrogance that somehow we're going to do a 
command control, it disturbs me. Because at some point you're 
making an assumption that an investor, whether they're bidding 
on 25 houses--which we need to talk about, whether you should 
offer a pool size of that--or 1,000 houses, as we bought. We 
don't know how to manage the money, we're not interested in 
maximizing our rate of return, having good tenant 
relationships, all the things you would do in managing the 
money organically, without a command and control system.
    So, with that bit of tirade, let's first start--and I 
didn't even reset my own time. Ms. Burns, on your pool 
differentials and size, I noticed you did not go down to some 
of the previous discussions we had with your agency.
    Or, going down, even offering sort of micro pools, 25 
properties all the way up to 500,000. Is that just because you 
are offered so few properties in this pilot program?
    Ms. Burns. No, there are still small bulk sales that are 
done today. But, we felt that this particular effort was 
intended to try to bring in those larger investors, so we 
needed to have larger pools. We will still consider small bulk 
sales, but the concern was that there was already a program in 
place that was offering that kind of an arrangement. We also 
had heard, actually, from the small investors that they were 
more interested in financing than in the actual bulk option to 
buy; they were looking for financing so that they could buy 
properties one at a time and ultimately create their own pool.
    Mr. Schweikert. Okay. But in this experiment, if you were 
doing true price discovery, you would have done anything from 
25 to 1,000 houses.
    Mr. Stegman. Do you actually have someone who does this 
type of investor economics at the agency?
    Mr. Stegman. Excuse me?
    Mr. Schweikert. Do you have someone who has an expertise in 
this side of the housing economics, which is the investor or 
the sale take-down side?
    Mr. Stegman. There is expertise at Treasury in these areas.
    Mr. Schweikert. Okay. Our models used to always say that we 
would not even break even until we hit 200 houses in a pool. 
Just because of the--and that also mattered on our geographic 
distribution--just because of our property management 
mechanics. But, ultimately, you may have a group of dentists 
that all get together and they want to buy 25 houses. God bless 
them. You may have a REIT that says, we're not playing unless 
you can give us 1,000 properties and in a geographic, major 
urban area, because that's the type of money we have to park 
for our fees and management. And maybe this is best for Ms. 
Burns. Why shouldn't I be disturbed that there are so few 
properties in this program?
    Ms. Burns. Interestingly enough, while it sounds like 
Fannie Mae and Freddie Mac have a lot of properties that are 
just sitting on the market for sale right now, it doesn't 
really work that way. So, there are 170,000 between the two 
companies, and only about half of those are actually on the 
market for sale. And in concentrated and specific markets, 
there are only a handful of markets that have at least 1,000 
properties.
    Mr. Schweikert. But isn't that almost actually the point, 
you have a pipeline. Okay.
    Ms. Burns. Right.
    Mr. Schweikert. Particularly in intertrust States, I 
understand you have some States where because of the--the 
mortgage and the mechanics, that you may have redemption 
periods--
    Ms. Burns. That's right.
    Mr. Schweikert. --over here. But if you have literally half 
your inventory, and in my understanding, it's dramatically more 
than half your REO inventory that isn't even being marketed, 
isn't that literally the inventory you should be grabbing and 
moving into these?
    Ms. Burns. The inventory that's not being marketed is not 
available for sale because of the redemption periods, because 
of being repaired, because there are tenants in them, or 
families who are being evicted because the property has been 
foreclosed upon. They're in a state of preparation for sale. 
And that's sort of the way it always works, that there's some 
time period when the property is being prepared to sell.
    Mr. Schweikert. But the fact of the matter is you can still 
put a property up for sale, at least in the deed class to trust 
state, the day after you do the takedown of the deed of trust. 
And so, you're telling me, Maricopa County, the third, fourth 
biggest county in the country, has 400 houses? That's all you 
could put together in a pool?
    Ms. Burns. I will say, we were very sensitive to two sides 
of this issue. One is the real estate agent who is selling 
properties one by one to investors today, who felt that this 
bulk sales approach was interfering with a process that worked 
well today. So, we were very sensitive that there were plenty 
of people who were complaining that the bulk sales approach was 
actually problematic in bringing market recovery that we 
wanted.
    Mr. Schweikert. Okay.
    Ms. Burns. Then we had another side--
    Mr. Schweikert. Actually, that's economically backwards. 
The fact of the matter is, if you're in a marketplace that has 
4 or 5 weeks of property for sale, and we're actually hearing 
that the average contract, in at least my--and I know I'm being 
Maricopa County-specific, is getting 8 to 12 contracts now.
    Ms. Burns. Right.
    Mr. Schweikert. We're in a fascinating cycle. And every 
time a house sells--what is your model for winter property 
sales, of how many dollars go back into the rehab, or the 
carpet, the drapes, the landscaping? Do you have a base model 
of dollars?
    Ms. Burns. Do you mean in the existing retail sales 
strategy or in bulk sales?
    Mr. Schweikert. Yes, even in your retail strategy, because 
the amount's going to be the same, or your investor sales?
    Ms. Burns. Okay. That was the same question that--
    Mr. Schweikert. Okay.
    Ms. Burns. --Chairman Garrett asked, and I don't know the 
answer.
    Mr. Schweikert. We have a built model, that $6,000 was our 
average, so for whatever value that is. Think about the sales 
you're starving from Home Depot, from the local landscaper, 
from everyone else, by the trickle out here. If you want to 
stimulate effect in many of these marketplaces, sell the 
properties.
    Ms. Burns. It's ironic that you say that, because we 
actually have gotten articles from a number of people who think 
we should not engage in this bulk sales approach, pointing to 
just what you're talking about, saying, ``Look at how strong 
the Arizona market is; you shouldn't be doing bulk sales in 
these markets.''
    Mr. Schweikert. Yes.
    Ms. Burns. Just so you know.
    Mr. Schweikert [presiding]. No, I understand. But if you 
sit them down and explain to them that they're complaining that 
investors keep buying the properties, what's happened is you 
have just now forced the investors to go beat them to it at the 
auction steps, instead of the retail sale that you're doing. 
So, they're someone that doesn't understand basic housing 
economics.
    And I'm way over my time. Mr. Schilling, I now yield to you 
5 minutes.
    Mr. Schilling. Very good. I thank you for that. A couple of 
things. Boy, you're pretty good. Hey, will you let me know when 
I'm getting close on that timer.
    Mr. Schweikert. We'll just start tossing stuff at you.
    Mr. Schilling. Okay. That sounds good. What I wanted to do 
is go back to Mr. Stegman. Do you expect the Attorney General's 
mortgage servicing settlement to impact, or how do you expect 
it to impact the future of the REO companies, I guess? I'm sure 
it's probably seen as a positive impact, I would hope.
    Mr. Stegman. Congressman, I'm not sure about the REO and 
the current REO inventory, per se, but where the settlement 
comes into play is in the nonperforming loan areas, and whether 
or not a servicer who might sell a portfolio of nonperforming 
loans, that a portion of which then get modified would, nor to 
the credit of the seller of those, the servicer who has an 
obligation under the settlement, those issues are still being 
really clarified. But with respect to the already existing REO 
emporium, I'm not sure that there is a direct constraint, if 
you will, on this pilot.
    Mr. Schilling. Okay. And then do you know how many of the 
REO properties currently exist in the private markets?
    Mr. Stegman. Ms. Burns might be able to clarify. But my 
understanding was there were about twice the number of REO 
properties in the non-GSE portfolios, so we're talking about 
perhaps 400,000, and around 200,000 in GSEs.
    Mr. Schilling. Okay. And then given that neighborhood 
stabilization is the goal of the program, how long will it take 
to be able to determine if the program has been successful?
    Mr. Stegman. I think if you start with the pilot, clearly 
what we're trying to do is to learn from that pilot, and we 
don't expect--although, in a micro neighborhood, perhaps, we 
would be able to see in a pilot a couple of hundred rental 
houses improved and stabilizing, and maybe having an effect. 
But if you kind of look at what it takes to get to scale, and 
the real scale of the problem, this is not--it will take a 
while for this business model to grow and to reach scale, and 
to really have an effect on the market. So, this is something 
that we want to be able to watch. And one of the reasons why I 
think the pilot is so important, is that we have an interest in 
really learning from it in kind of a systematic way. Right now, 
it's not clear to me how we really determine what is happening 
across the country in the non-GSE States, and what effects it 
might have, because these are proprietary transactions where 
nobody is collecting kind of the baseline information and so 
on. But it will play out over several years.
    Mr. Schilling. You see, I'm a small business owner in the 
Quad Cities and I struggle with that, because we ought to have 
some picture of what the success of this program is. I'm with 
David on this, in that I don't believe that we should--we have 
to sell, we have to get rid of these houses, basically. And, I 
think we saw this coming for years; we knew it was happening. 
People who probably--not everybody should own a house. When you 
come in, and the Federal Government, every time they engage 
this process and try to, so to speak, take it over, that's why 
we're in this mess we're in. People were buying houses who 
should not have been buying houses. My wife and I, when we 
started out, we couldn't afford a house, so we rented. But what 
happened over time is that you could just qualify without 
qualifying. So I just get frustrated with everything that's 
going on.
    Mr. Stegman. Congressman, there's a difference between--we 
know what success looks like and how long will it take for 
success to materialize and to be evident. And I think, as I 
said in my testimony, there are places that are seeing surging 
rents because of the increases and demand.
    And we would expect to see that relative to other places 
that don't have these kinds of pilots and programs moderating 
rents. We would hope to see stabilization of home prices and 
improved performance of mortgage loans there. So, there are a 
number of outcomes that I think we wouldn't see, but depending 
on scale and where these are and what is happening in the 
general economy will determine how long it takes to see this.
    Mr. Schilling. One of the things I find, and this is my 
first time ever serving in Congress, I actually had no 
intentions of ever running for a public office until I was 
watching what was happening to my country, to be quite forward. 
But, do we have--you have a little bit of a background on David 
and his background. Do we have people in your service, who work 
with you, who have the expertise similar to what this person--
because the thing I find with the Federal Government, it's a 
bureaucratic system to where they appoint their friends and 
buddies. And it's quite frustrating, to be forward. But, do we 
have the experts? We have people who are putting the healthcare 
systems together who have no expertise in healthcare. But, do 
we have some top-notch people? We have some great Americans, 
I'm sure they're out there, but do you feel that you guys have 
some good solid people who are in there trying to put this 
pilot together and make some good decisions for the United 
States of America?
    Mr. Stegman. If you want to talk about putting the pilot 
together, speaking from the Treasury perspective, we have an 
enormous amount of talent. But you also have to appreciate that 
we are talking with stakeholders, investors, folks with the 
kind of experience that you're talking about, institutional 
investors, small investors, all the time about the kinds of 
issues that we're talking about. So, we're not sitting in a 
bubble or a vacuum trying to think grand thoughts. We are 
really connected to the markets and the communities.
    Mr. Schilling. Very good. Thank you all. My time has 
expired.
    Mr. Schweikert. Thank you, Mr. Schilling.
    Mr. Huizenga?
    Mr. Huizenga. Thank you. And I just want to--that's the 
good thing about having a smaller field hearing like this, we 
get lots of bites of the apple, otherwise we're--
    Mr. Schweikert. More chances to ramble.
    Mr. Huizenga. Yes, as freshmen, we're so far down on the 
dais we have to be there an hour-and-a-half before we can 
actually question you. So, this is great. I want to kind of 
return to my understanding of these eight pools. You're saying 
they're pools divided up between one to 500 homes. As Mr. 
Schweikert was saying, they didn't really look at pools until 
there were about 200 homes, 200 properties. I'm not sure if 
that was--
    Mr. Schweikert. We didn't make a profit until we hit 200, 
to cover our management expenses.
    Mr. Huizenga. And there are different models for different 
sizes, and I certainly know some people who at least view 
themselves as professional investors who may do smaller and 
those kinds of things. But it seems to me we're trying, if 
we're going out and basically saying, ``Hey, who wants 2,500 
homes?'' What kind of REIT might be out there looking at that? 
That's what I at least heard you were indicating, that there's 
an opportunity to buy the 2,500 down to 25. Those are very 
different, very different business models, and investment 
models.
    So, I guess two things. One, I would like you to--and I 
assume, Ms. Burns, it's probably your area here--describe how 
this bulk sales scheme--and I use that in the British sense--
scheme, plan, project is different than the current bulk sales 
that you have talked about. So, explore that a little bit, and 
then I want to touch on maybe more philosophically, both from 
Mr. Stegman and yourself, the speed of which is most beneficial 
to have these properties through the process, that it seems to 
me pretty clear we need to go through. And what are the 
benefits and the liabilities of slowing the process down and 
only making this 2,500 versus speeding it up and some of those, 
maybe, dueling views as you indicated. So, if you could touch 
on those two things for me.
    Ms. Burns. Sure. Let's start with slowing down, speeding 
up. There were 2,500 properties total across the whole country.
    Mr. Huizenga. Actually, it would be more helpful for me--
    Ms. Burns. Yes.
    Mr. Huizenga. --if I knew the differences between what 
you're talking about with this program versus what is currently 
happening.
    Ms. Burns. Okay, sure. The existing small bulk sale program 
takes properties that have been marketed for some period of 
time, generally, 6 months. They were put out for sale to a 
nonprofit or an owner/occupant first, for 15 days, if they 
didn't sell, then investors had an opportunity to purchase the 
property that didn't sell.
    Mr. Huizenga. Basically, everybody has passed.
    Ms. Burns. Everyone has passed it over--generally, low-
value properties that, for whatever reason, have not sold, 
maybe the condition, maybe just the market and the location 
itself. Those properties are pooled up and sold often to local 
governments, nonprofits, smaller investors who are looking to 
repair and put them into rental arrangements, generally.
    Mr. Huizenga. How big are those lots, typically? Are we 
talking 5 homes or 50 homes, or--
    Ms. Burns. I actually don't know.
    Mr. Huizenga. Yes, I didn't mean lots, we're using way too 
many ``lots'' and ``pools.''
    Ms. Burns. Yes, I know. I don't know the average size of 
those pools. I know that they're smaller than the ones in this 
bulk sale approach, which has 100, so, 30 to 50.
    Mr. Huizenga. Could you get that information to me?
    Ms. Burns. Sure, absolutely.
    Mr. Huizenga. That, to me, is of interest.
    Ms. Burns. Sure.
    Mr. Huizenga. If you have stale property that has been out 
there, and my guess is if it's on there for 6 months, it's 
probably on there for 18 months. That's what I'm hearing from 
my former colleagues is, you have new property hitting the 
market, it's either gone or it's going to just become a 
dinosaur and it's going to stay, for whatever purpose. So, if 
you could maybe--afterwards we'll do some follow-up, that would 
be helpful on understanding this current schedule.
    Ms. Burns. Sure, absolutely. So, this new bulk sales 
program is really intended to create larger pools and--
    Mr. Huizenga. Presumably with slightly better properties.
    Ms. Burns. Better properties, exactly. Take them off the 
market earlier in the process. Not post-retail sales strategy, 
but as soon as they come to Fannie Mae and Freddie Mac and are 
prepared for sale and are eligible for sale. As well as, of 
course, we put in the rented units. Fannie Mae in particular 
has a very large number of units that are already rented, they 
already were owned by investors whose properties were 
foreclosed upon.
    So, we're trying to put those two groups together in these 
pools. The speed with which we can move these pools, this first 
transaction is taking longer, in large part because, as 
Chairman Garrett said, we want to get it right. We have had 
lots of negotiations and discussions about how to balance out 
competing interests. There are people who think that we 
shouldn't do bulk sales at all, because there's sufficient 
demand in most of these markets from other owner/occupants or 
investors. And there are parties who think that we need to be 
very careful about engaging the local organizations which have 
been involved in NSP activities and such, and use these 
properties as part of efforts already under way. We're to find 
the middle ground between those two, and so we're trying to be 
very careful in how we design this first transaction.
    Mr. Huizenga. And I see my time has expired, so we might 
have to explore more of the aspect of the process, but--and I 
know we have--the march of time is on us all as we are going to 
have to get on planes to Washington, D.C., and those kinds of 
things. But I appreciate this, and I would love to continue 
that conversation. Thank you.
    Ms. Burns. Sure.
    Mr. Schweikert. This is fun, when you're timing, of course 
I can just--share with me when--right now in the 2,500 that are 
being broke down here. Was I to understand a large number of 
these already have underlying rental contracts?
    Ms. Burns. That's correct.
    Mr. Schweikert. In your attempt to do price discovery, have 
you broken them apart, saying, here are ones that already have 
underlying rental agreements, and so rental property rights and 
those that don't?
    Ms. Burns. Yes. So, ultimately, when the bids come in after 
this qualification process and we get to the eligible bidders, 
when the bids come in the bidders will tell us how they value 
each property. And so, we'll have a sense of their perspective 
relative to our perspective, and we'll have the opportunity to 
see, do they pay more if there's a renter in the home, do they 
pay less if there's a renter in the home.
    Mr. Schweikert. Okay. And are you providing the data of the 
rental stream, both the rent and quality of the tenant in 
regards to the payment history?
    Ms. Burns. Yes.
    Mr. Schweikert. How soon the rents come in.
    Ms. Burns. Yes. There's a data room where all of the 
investors can see for every single property, photos, rent 
information, title information, everything that they would 
need.
    Mr. Schweikert. And disposition of the assets. So, let's 
say my new best friend here, he and I have our pool, we're one 
of your qualified bidders, and we buy 400 properties. We're 
blessed to get this. Are we deed-restricted, and if so, for how 
long, before we're allowed to sell?
    Ms. Burns. You're restricted for 3 years, but there is the 
ability to sell up to 10 percent of your subpool.
    Mr. Schweikert. Okay. So we are going to do a 10-percent 
rule.
    Ms. Burns. Right. And if any particular property presents a 
challenge in terms of cash flow, rental income cash flow, it's 
just not economic to hold it, that may be considered for sale, 
as well.
    Mr. Schweikert. Okay. But, is this going to be done through 
a deed restriction?
    Ms. Burns. Yes.
    Mr. Schweikert. Okay. So, each title in the property will 
have a deed restriction, saying it cannot come up for sale 
within this period of time. And so, they're going to have to 
come back to you for release clause releases on the 10 percent 
I'm allowed to sell each year, plus an application of another 
release on that deed restriction if I have a property where 
either I have a family who are my tenants who are ready to buy, 
and that's specific to them, so that's a unique circumstance, 
and we want these folks to be homeowners, they have been good 
tenants, or a property that I can't for some reason lease, or 
has some other inherent structural problem to lease it. But I 
would still have to come back to you to get that deed 
restriction released.
    Ms. Burns. Right. Sometimes, there are actually two options 
available to the bidders. There are joint venture arrangements 
where Fannie Mae will actually continue to be a partner, in 
which case Fannie Mae will definitely be saying yea or nay to 
the sales. There's also the option to buy the properties 
outright, just an outright sale. There are restrictions that 
are imposed either way, but when--
    Mr. Schweikert. Let's just work on our scenario. We're a 
cash buyer, we buy the properties. Your ability to hold the 
court--
    Ms. Burns. Right, that has been--
    Mr. Schweikert. --that is through a deed restriction.
    Ms. Burns. Yes.
    Mr. Schweikert. So, you're going to have to have a whole 
mechanism process where I'm coming to you, just as if any of 
you have ever been in bulk sales or multi-lot sales, those 
things, where you do like a lien release, in this case it's a 
deed restriction release. And have you thought through those 
mechanics?
    Ms. Burns. We have certainly talked about it at length, 
this is one of the issues that we have talked about balancing. 
There are concerns on the mission-related side that these 
properties be held for some period of time for rental. It 
likely will affect pricing. It will affect pricing for all the 
reasons you're saying. The flexibility and the optionality to 
the buyer is gone. So, this, again, is a test and we'll see how 
it plays out.
    Mr. Schweikert. Mr. Stegman, have you seen much of a 
regional difference in interest on the 2,500 properties so far?
    Mr. Stegman. We are not privy to potential bidders or what 
is going on in the data room or anything like that.
    Mr. Schweikert. All right. Ms. Burns?
    Ms. Burns. I have actually seen some information, but I 
don't think from what I have seen, I have seen any obvious 
trends--
    Mr. Schweikert. So, you have seen--
    Ms. Burns. --or obvious patterns.
    Mr. Schweikert. But your initial impression, I accept this 
is anecdotal, is sort of across-the-board, is that the interest 
is wide. I do want to do one, and this is me being cranky, but 
hopefully in a loving way. You made the comment about how we 
don't have lots of data from the Nation and different 
marketplaces, and correct me if I'm misphrasing you, on other 
bulk sales that have been done through private servicers or 
other things out there. And I will very, very aggressively 
disagree with you, real estate is a very public market. That's 
why we record it and we get lots of data. And there are 
actually whole newsletters and magazines every day coming to me 
from them, I have to find some way to unsubscribe to them, that 
tell me, ``Hey, you know, this little package was sold and sat 
in California through servicer `X,' `Y,' and `Z' of these 10 
houses. Half of them are rented, here's their cap rate, etc.'' 
We're flooded with data on this type of situation.
    Mr. Stegman. We have access to newsletters you're talking 
about, we see reports on varying cap rates. What we don't know 
is the effects that these sales are having on the larger 
market.
    Mr. Schweikert. But that's easy to--
    Mr. Stegman. And--
    Mr. Schweikert. But that's absurd. You can actually then 
look at the market area and you see what's selling per price, 
per square foot, in the different subcategories. I had this out 
of my home office on my servers. It just--
    Mr. Stegman. Right.
    Mr. Schweikert. I'm concerned because this is a very 
sophisticated, very mature--
    Mr. Stegman. Yes.
    Mr. Schweikert. --very disciplined market. And my great 
fear as--look, this isn't your world of expertise, and it 
shouldn't be. But you're coming in and trying to rebuild the 
world that's out there, where there are thousands, tens of 
thousands of people who do this every day.
    So, let's see, I had one or two other just sort of--how 
soon, let's say this is magic and everyone loves you and it 
just clicks off, and you're elated, how soon before you do the 
next sale, and how far are you willing to scale up?
    Ms. Burns. Obviously, we're going to learn a lesson from 
this first sale. We would like to do the next sale quickly, we 
have already started identifying markets and assets in the 
hopes that we can put forward another sale within just months 
of closing on this first transaction. However, we do need to 
see, what is the appetite for different size pools, which of 
these assets seem to be valued better than others? So, we have 
to take the opportunity to learn what we can from this first 
transaction.
    Mr. Schweikert. How many applications do you have so far?
    Ms. Burns. For, to become--
    Mr. Schweikert. To be a bidder.
    Ms. Burns. --qualified to be bidders. I don't think I'm 
allowed to tell you that. I'm following the SEC private 
placement rules for this process. But based on what you said 
earlier, it's fewer than you think.
    Mr. Schweikert. Okay.
    Ms. Burns. You said hundreds and hundreds before; it's not 
hundreds and hundreds.
    Mr. Schweikert. All right. And the next thing is, so, I'm 
hearing that you haven't really picked up a regional 
distribution in it, but you have qualified bidders, do you 
believe some of the mechanical restraints you have added, are 
there any things you believe that have been put in your bid 
requirements, that you believe are acting as pushbacks for 
investors to say, ``Well, the heck with this, I'll just go buy 
on the auction steps instead?''
    Ms. Burns. I don't know yet. We're very curious to see 
that. I think we're very concerned that any restrictions at all 
could affect pricing and could affect an appetite. So, I think 
this is an opportunity to see.
    Mr. Schweikert. In the next bidding, in the next pool 
package, are you also going to try to restrict it to properties 
that already have rental agreements underlying?
    Ms. Burns. Again, we'll have to see how this first 
transaction goes. We had originally planned to have only vacant 
in the next transaction, but given the timing of this first 
transaction and how long it took us to get this transaction 
from opening announcement through to fruition, I would be 
concerned, again, about having vacant properties held off 
market for an extended period of time.
    So, we might try the next transaction with rented 
properties again.
    Mr. Schweikert. Okay. My great fear is you're creating a 
sort of restraint and barrier, and the inefficiency of grabbing 
property that, you know, the deed has been transferred over is 
yours not the market's. The efficiency of saying, here's our 
inventory--90 days from now, we're putting it up for auction. 
That's an inefficiency on your side.
    And the last thing, then I'll see if my friend, Mr. 
Schilling, has any last questions or comments, and we might 
move on to the next panel, is part of this passion is, I lived 
this housing crisis. I was the county treasurer as the world 
was coming to an end. So, I oversaw the real estate tax 
collections. I have been on all sides of this. Arizona has 
gotten dramatically better faster than almost anyone else, 
because we're cleaning out our inventories. People are finding 
jobs again, they're getting to be able to buy houses again. 
It's coming back after. And in many ways the restraint, saying, 
well, we don't want to put too many properties on the market, 
these restraints actually have taken what should have been a 3- 
or 4-year housing depression.
    And I see what's going on in some of the mortgage States 
and some of the States that have had prolonged foreclosure 
processes, and, oh, we're going to do another moratorium. And 
those States, all maybe meaning well here, will be in a housing 
depression for a decade because of not understanding basic 
housing economics. And my fear is I don't want you to be one of 
those that, almost like back in the RTC days, if you look at 
the real reports that were done, we took a 3-year commercial 
real estate collapse and made it last almost 10 years because 
we trickled out the assets. And every time you sell a house, 
someone gets a job, whether it's making the carpet, whether 
it's fixing up the windows, something.
    Look, if you will sell these and move them as fast, I will 
stand in the parade and I'll defend you from those who don't 
understand reality. But my great fear is by not pushing, by 
becoming bureaucratic and not moving these assets through, 
you're crushing people. You're killing their ability for their 
housing values to come back up for those neighborhoods to 
recycle. This is not our version of urban renewal, but in a 
weird way that's what's happening.
    So, Mr. Schilling, outside of that diatribe, any other last 
questions?
    Mr. Schilling. I don't have any. I would just like to--I 
think this could be a thing where we come in with good 
intentions, with some unintended consequences that make this 
prolonged and go further. But I just want to thank you both for 
coming in. And with that, I yield back.
    Mr. Schweikert. The Chair notes that some Members may have 
additional questions for this panel, which they may wish to 
submit in writing. Without objection, the hearing record will 
remain open for 30 days for Members to submit written questions 
to these witnesses and to place their responses in the record.
    This panel is now dismissed. Thank you for your time.
    [Recess. Panel change.]
    Mr. Schweikert. Let's go ahead and start. This is our 
second panel in this field hearing. You, hopefully, all heard 
some of the dialogue from the previous panel. What we would 
love is some more details of the reality of what you see 
happening in the marketplaces, how we both satiate genuine 
demand, but also through this process help bring back our 
housing market, and particularly in those submarkets that have 
been hardest hit. And is the mix of bulk sale, instead of many 
of those who have great concern that the retail pipeline, just 
because of the mechanics, is not designed to deal with both 
this type of product flow and all of a sudden the spikes of 
demand actually goes up, goes down, and this particular cycle 
starts to come back up. Are we doing what's necessary to have 
that stimulative effect in the environment around us, and is 
that satiating that demand? I'm going to turn to my neighbors 
here and see if anyone else has an opening statement. Mr. 
Schilling?
    Mr. Schilling. I just want to say it's an honor to be here, 
and I thank you all for coming.
    Mr. Schweikert. Mr. Huizenga?
    Mr. Huizenga. I think everybody would rather hear from you 
than me, so let's go.
    Mr. Schweikert. Our second panel consists of: Mr. Sean 
Dobson, CEO of Amherst Holdings; Mr. Rob Grossinger, vice 
president of community revitalization for Enterprise Community 
Partners, Inc.; Ms. Mary Kenney, executive director of the 
Illinois Housing Development Authority; and Mr. Dick Pruess, 
CEO of the Community Associations Institute.
    Mr. Dobson, we will begin with you. You are recognized for 
5 minutes.

  STATEMENT OF SEAN DOBSON, CHIEF EXECUTIVE OFFICER, AMHERST 
                            HOLDINGS

    Mr. Dobson. Great. Thank you. Mr. Chairman and members of 
the subcommittee, thank you for your invitation to testify 
today. My name is Sean Dobson, and I am the CEO of Amherst 
Holdings. Amherst Holdings consists of several Enterprises, all 
of which support institutional investors and various portions 
of U.S. real estate demands markets.
    My partners and I have been a part of the housing finance 
infrastructure of the United States for over 25 years. I want 
to point out that, although we are a dedicated real estate 
finance platform, Amherst demurred on the opportunity to 
originate and underwrite subprime Alt-A pay option mortgages 
and their residential mortgage-backed securities (RMBS) and 
collateralized debt obligations (CDO) progeny.
    I am here to discuss our views of the U.S. housing markets 
and how we view the costs and benefits of properly managed bulk 
sale transactions. Last year, over one million homes were lost 
to foreclosure; these homes were liquidated through a legacy 
process targeting owner/occupant buyers. Unfortunately, the 
bursting of the housing bubble and the subsequent retraction of 
credit availability left very few qualified perspective owner/
occupant buyers. As is to be expected, these conditions mean 
that the majority of foreclosed homes are already being sold to 
investors. We believe that a well-designed bulk sales program 
will have little upfront costs and have a very large and 
positive impact. I would like to start to talk about these 
benefits from the ground up, and then we'll talk about the 
upfront costs.
    As you likely know, the GSEs currently own thousands of 
homes that were foreclosed upon with a tenant in place, tenant-
occupied. In these cases, a borrower defaulted on a mortgage 
after leasing the property to a tenant family. If these homes 
are liquidated via the current process, the leases will not be 
renewed. The families will be asked to move, and the homes will 
be sold, primarily to investors. The Fannie Mae pilot program 
for bulk sales are these tenant-occupied homes. If a long-term 
investor purchases these home through a bulk sale, many of the 
tenants will be able to stay in place. By simply short-
circuiting the process, we accomplish simple things. Children 
stay in their schools, neighborhoods are maintained, and lives 
are not disrupted.
    At Amherst, we purchased the only auction of these types of 
homes ever conducted by Fannie Mae. We were able to maintain 
one-half of the occupants in their residence. If a successful 
market for occupied homes is established, this type of benefit 
could also accrue to owner/occupants nearing foreclosure.
    Another first order benefit of a bulk disposition program 
is the increase in speed at which housing is returned back into 
the market. In the previous panel you heard a lot of discussion 
about the inflation, rents, and the tightness of the rent 
markets. It's important to understand that even though we have 
not recovered the jobs lost in the recession, vacancies are 
dropping and rents are rising. This is a symbol of a very tight 
market, and is putting pressure on families.
    Beyond these first-order benefits, we think a series of 
bulk sales will have a direct and positive impact on home 
prices. Currently, the investor base purchasing homes is highly 
fragmented and, as a consequence, experiences a high cost of 
capital relative to the overall market. In other words, 
investment housing is a cottage industry and has very little 
access to the equity or debt capital markets. The key to 
decreasing capital cost, and thereby increasing home prices 
back to some semblance of fair value is standardizing the 
single-family leasing industry and creating a smooth capital 
transfer mechanism.
    The depths of the mortgage problem can be measured in 
several ways. The Nation's REO inventory sits at around 400,000 
units, yet this is but the tip of the proverbial iceberg. Our 
data shows over 3.3 million mortgages with underlying real 
estate value around $430 billion have not received a payment in 
over 12 consecutive months. Behind that mountain of real estate 
lies another six-plus million units that are either delinquent 
or are so deeply credit-impaired that they are hanging by a 
thread. When you contrast these horrific numbers to the 85,000 
units of REO being sold each month, you realize that either the 
pace of liquidations has to increase, which under the current 
model could drive home prices even lower, or this backlog will 
stand as a threat to the economy for at least another 4 years.
    Because of the Fannie Mae pilot programs, we and others 
have embarked on building the appropriate platform to shepherd 
the necessary capital to the market. Until now, a mechanism for 
this purpose has not existed. The work we and others are doing 
could very well change the conversation around housing and 
create a backstop for home prices.
    It's worth adding that without this infrastructure to pass 
capital from the markets to housing, the Federal Reserve's 
dramatic monetary policy efforts are pretty much in vain. It 
does not matter how low bond rates go or how many mortgages the 
Federal Reserve buys, if the credit and capital transmission 
system is insufficient.
    In summary, institutional capital allocated to single-
family rental housing can ease trauma to current residents, 
increase availability and quality of new housing, produce a 
significant increase in home prices, and remove the fear 
surrounding the backlog of unresolved defaulted mortgage loans.
    Naturally, the question will arise, at what cost? It's a 
controversial statement, but it may indeed not cost a thing. 
There is significant discussion about the level of price 
discount required to attract bulk buyers. We believe any 
discount achieved early on will be short-lived as capital costs 
fall, and will be minimal compared to the single asset strategy 
once all transaction costs are accounted for. Even if there are 
small costs to priming the pump with the first transactions, 
the price of the next 400 billion sales should be much higher, 
and as capital forms around the asset the confidence builds. No 
matter what your position is in this debate, it's hard to argue 
that the status quo is acceptable. The backlog of unresolved 
default mortgages hangs as a pall over the U.S. economy. The 
lack of credit, lack of confidence, and the continual threat of 
a tsunami of distressed sales have conspired to undermine 
housing and prevent the sectors normal contribution to the 
overall economic activity and job growth. We believe bulk sales 
attract new source of capital to housing and will alleviate 
these fears and potentially unlock housing, allowing it to once 
again contribute to job growth and economic activity.
    Thank you for the opportunity to testify.
    [The prepared statement of Mr. Dobson can be found on page 
50 of the appendix.]
    Mr. Schweikert. Mr. Grossinger?

    STATEMENT OF ROB GROSSINGER, VICE PRESIDENT, COMMUNITY 
      REVITALIZATION, ENTERPRISE COMMUNITY PARTNERS, INC.

    Mr. Grossinger. Thank you. And thank you, Mr. Chairman, and 
members of the subcommittee for the invitation to testify. My 
name is Bob Grossinger with Enterprise Community Partners. We 
are a national nonprofit that has been in the arena of 
financing affordable rental housing for the past 30 years. We 
have provided upwards of $11 billion in equity, and helped to 
finance over 300,000 rental units throughout the country.
    But prior to this job, and somewhat relevant to this 
testimony, I was originally with the LaSalle Bank here in 
Chicago, and then acquired by Bank of America. And my first 
assignment with Bank of America was to go out to California and 
work with--on the Countrywide transition, dealing with, what 
are we going to do with all of these assets? So, for a fun 3 
years--
    Mr. Schweikert. Forgive me for interrupting. When does your 
book come out?
    Mr. Grossinger. I'm not sure; I think I'm blocking out most 
of the experience.
    But, what was interesting during those 3 years was to look 
at a system, as has been previously testified, that was ill-
equipped to deal with what we have now. And when we talked 
earlier, Congressman Schilling mentioned who was at fault. I 
guess I was, because I was working with Countrywide and that 
was one of the biggest fault producers that was out there. So, 
to some extent, I saw an evil and I was part of it.
    I do want to also state that I appreciate what FHFA did, 
and Meg Burns, in bringing together some of the large national 
nonprofits along with some of the for-profit equity funds that 
are looking to get into this space, to talk about this bulk 
sale opportunity, the pilot, and what may happen after that. We 
had a number of very good discussions in Washington, as Ms. 
Burns stated, and the national nonprofits that were at the 
table did indicate that we didn't see the value of any sort of 
forced marriages between nonprofits and for-profits. We think 
that has to happen organically.
    But, I will say that the best part of those two sets of 
meetings in Washington was a marriage that we have been able to 
make with a private equity fund, to look at doing things 
together in three markets around the country. And when you talk 
about that marriage, along with what I think is the most 
important part of this discussion, you have to look at this 
issue as it happens at the ground level. And as I think all of 
you know, at the ground level it's all about location, 
location, location. What happens in Maricopa County in Arizona 
is very different than what's going to happen on the south side 
of Chicago or in Cleveland or in Detroit or in Atlanta. And 
even within Atlanta, there are different markets, and there are 
micro markets in each.
    So, our goal, and the purpose, if I get nothing else across 
in this testimony, is that we're not interested in trying to 
direct, hamstring, put shackles on private equity as it looks 
at the markets it wants to look at, but there are many markets 
it just doesn't want to look at. And what we found in our 
relationship now with this private equity firm, is we have done 
some controlling, some education, some bringing capital that we 
have to the table, to get them to look at markets that they 
were skipping over. They just were not economical to them, they 
didn't understand them at the micro market level. So, their 
data analysis was done at the city level, but within that city, 
there were many micro markets that could be helped, that could 
still be saved.
    And so what we did, is we literally put them in a van and 
took them on a tour and showed them, with city officials from 
this particular city, these particular neighborhoods, and now 
all of a sudden, they want to do business there and they want 
to do it with us, so we're forming our own fund, the two of us, 
we'll form a limited liability corporation and we'll start 
buying REOs in those neighborhoods, that before our partnership 
they wouldn't enter. So, it's how do you, from a nonprofit 
standpoint, it's both, how do we partner effectively without a 
shotgun wedding, and, also, how do we target those 
neighborhoods the private equity is simply going to skip.
    I think your motto in Arizona, Congressman, what you have 
been doing is a great example of when you maximize private 
capital with a demand, and be able to produce, I think you said 
over a thousand properties that you have been able to take 
under management and rent. However, when I look at bulk sales, 
my big fear is that the losers get, politely said, chucked 
away.
    In all of our interviews with private equity funds over the 
last few months, ones that have been in existence for a while 
and the ones that are forming now, and there if you added up 
all the numbers that you have read in The Wall Street Journal 
or in Bloomberg's, it's $5 billion to $7 billion of equity that 
has been forming for this. What we found is that when they buy 
in bulk, the bottom 20 percent of the assets that they don't 
want, they tend to walk away from.
    That may change as the new--as these new formations happen. 
We want to make sure that it doesn't happen, that you don't 
look at certain neighborhoods and say, okay, I got a good deal 
by buying 100 properties, and 20 of them I was able to work 
with the homeowner to save them. These are note purchases. If 
you look at REO purchases, I could sell 20 of them above 
market, I can sell 20 of them--and you go down that waterfall. 
But when you get to the bottom 20, you know what, these are 
going to cost me $90,000 to rehab. I'm going to walk away.
    So, I would just ask that in any next set of bulk 
transactions, we look at monitoring so that walk-aways are 
taken care of. We look at whether there's going to be financing 
available from the GSEs, that sort of team.
    And last but not least, I'm going to--I was going to talk 
about this, but I'm going to refer to Mary Kenney to talk a 
little bit about the mortgage resolution fund we have created 
with her leadership here in Illinois, to purchase notes to save 
homeowners.
    [The prepared statement of Mr. Grossinger can be found on 
page 58 of the appendix.]
    Mr. Schweikert. Thank you so kindly. And what a fine intro.
    Ms. Kenney?

   STATEMENT OF MARY R. KENNEY, EXECUTIVE DIRECTOR, ILLINOIS 
              HOUSING DEVELOPMENT AUTHORITY (IHDA)

    Ms. Kenney. Thank you, Mr. Chairman, and members of the 
subcommittee. My name is Mary Kenney, and I am the executive 
director of the Illinois Housing Development Authority. Like 
most HFAs, IHDA started out as a bonding authority. It was 
created in 1967, and at that time had just a dozen employees 
and very few assets. Today, it's an agency that has more than 
260 employees and $2.5 billion in assets.
    Since 1967, we have financed more than 200 units of 
affordable rental housing, comprising nearly 1,800 developments 
in every county in the State. And we do so in partnership with 
the private sector, acting as a lender, selling tax-exempt 
bonds and other mortgage-backed securities in the capital 
markets to finance our mortgages.
    In addition to our multifamily business, we operate an 
affordable homeownership lending program, a program which has 
struggled in recent years. As the mortgage market accelerated 
and exotic loan products became the norm, our program, which 
provided just a 30-year fixed rate, really couldn't compete. 
Despite pressure from Wall Street to change our marketing 
practices in order to boost originations, we held firm to our 
model, and the program all but shut down in 2007. Today, the 
program is again thriving, providing needed liquidity to a 
market that sorely needs it. And, our originations have gone 
from zero in 2009, to an expected $250 million this year.
    For the last several years, our work, as yours, has taken 
place against the backdrop of the foreclosure crisis that has 
shaken our housing industry to its core. The crisis has been 
particularly acute in Illinois. And as a result, my agency has 
focused its full attention on how to help homeowners and 
communities within our State.
    We have launched two programs to help combat the rising 
tide of foreclosures, and several new programs aimed at 
reducing the number of vacant properties within our 
neighborhoods. We believe that the GSEs can play a necessary 
and important role in assisting our work in both of these 
areas. And I'll direct my comments to the REO-to-Rental later 
in the context of the work that we have been doing.
    Illinois was lucky enough to be one of the 18 States--or 
unlucky, depending on how you look at it--selected to receive 
Hardest Hit Funds from the U.S. Treasury. In September of last 
year, we launched a program, and to date we have helped more 
than 2,200 Illinois homeowners keep their home, and we continue 
to provide assistance to new households at a rate of about 20 
per day. I am very proud to say that Illinois now has the 
second highest program in the country, second only to 
California, which has triple the resources and employees.
    In addition to our work on HHF, as Mr. Grossinger 
mentioned, the State has partnered with a number of entities 
from the private sector, including Enterprise, on a very 
innovative program utilizing some of our HHF funds. We set 
aside $100 million in Hardest Hit Funds to create the Mortgage 
Resolution Fund Program.
    In simple terms, the program aims to keep families in their 
homes by utilizing the funds to purchase delinquent mortgages 
at a discount, and then leveraging that discount to permanently 
modify the mortgages of qualifying households to an affordable 
level. The program is the first of its kind and is the only 
program in the Nation that utilizes the current reduced market 
value of the property to the benefit of the homeowner so that 
they can stay in their home.
    Over 100,000 new foreclosures were filed in Illinois last 
year, and we believe that stopping the flow of new REOs is the 
best and most cost-effective approach to combating the plague 
of vacant properties in our community.
    I believe that the GSEs have an important role to play in 
this regard. To date, all of the loan purchases have been made 
through the private sector. In order to work more efficiently 
and to bring the program to scale, we believe that the GSEs 
must participate by selling pieces of their portfolio at the 
current market rate.
    IDHA is also helping communities struggling with the 
aftermath of foreclosures, working to alleviate the huge 
inventory of vacant properties. IDHA received a total of $58 
million under the Federal Neighborhood Stabilization Program, 
and through this program IDHA has committed resources to 
redevelop over 450 vacant foreclosed and abandoned properties. 
We are now leveraging these investments through an innovative 
new State program.
    In February of this year, Governor Quinn launched his own 
program, known as the Illinois Building Blocks Pilot Program. 
Building Blocks is a multifaceted and comprehensive approach 
designed to help communities and their residents along every 
phase of the foreclosure continuum. The program employes a 
three-pronged approach. First, it aggressively targets existing 
resources to struggling homeowners. Second, it provides direct 
financing to developers willing to acquire and rehabilitate 
vacant homes. And, finally, the program provides a robust and 
aggressive homebuyer financing package, including a $10,000 
downpayment assistance for homeowners willing to purchase a 
vacant property within 6 of the selected communities. The goal 
is to stop the flow of new vacant properties and to restore 
existing vacant properties to productive use.
    One important way the GSEs can help States address the 
vacant properties is by assembling available properties by ZIP 
code and making them available for purchase at a reduced rate 
through governmental entities that agree to assist in financing 
their acquisition and rehabilitation by private entities. This 
would allow States to address large lots of vacant properties 
in their communities in a way that is consistent with local 
planning and will have a real impact.
    While we are excited that Chicago has been chosen as one of 
the pilot communities for the REO-to-Rental, we had the 
following observations. A scattered approach will not be 
effective. Our understanding is that there are currently 99 
properties in the Chicago region, scattered throughout the 
region. This is not enough to provide a critical mass, will be 
difficult to manage by the investor, and will likely have no 
effect on any given neighborhood. A local and leveraged 
approach is optimal to best serve the public interest and 
stretch the taxpayer's dollar to maximum effect. While 
minimizing losses to the GSEs is the ultimate goal, it should 
be balanced against the needs of our communities and 
stabilizing property values to all our citizens.
    Finally, I wanted to make one note to the committee on a 
slightly separate but related topic. And that is, there has 
been a bill that has been submitted to the Congress on two 
occasions related to a Ginnie Mae wrap for the FHA Risk Share 
Program, and I think that all of the vacant properties in our 
communities stand evidence to the tremendous need for 
affordable family rental housing. The bill that was proposed 
would provide a Ginnie Mae wrap to the existing Risk Share 
Program that the HFAs administer. And it actually has--CBO 
found that it would save the Federal Government $20 million 
over 10 years, so there is no net cost to the budget. It also 
would not expand the Federal Government's role in housing. I 
would be happy to elaborate on that for you.
    [The prepared statement of Ms. Kenney can be found on page 
68 of the appendix.]
    Mr. Schweikert. And we'll beg you to send us a copy. I know 
we're a little over time.
    Ms. Kenney. Sorry.
    Mr. Schweikert. Mr. Pruess?

 STATEMENT OF DICK PRUESS, ON BEHALF OF COMMUNITY ASSOCIATIONS 
                        INSTITUTE (CAI)

    Mr. Pruess. Mr. Chairman, members of the subcommittee, my 
name is Dick Pruess, and I live in the Castlegate Homeowner's 
Association in Pasadena, California. Thank you for the 
invitation to testify this morning on behalf of Community 
Associations Institute.
    CAI is the only national organization dedicated to 
supporting community associations and association homeowners. 
There are approximately 62 million residents living in 315,000 
associations across the Nation. Community associations are more 
commonly known as homeowner or condominium associations. Our 
homeowners are facing a crisis, and I believe taking into 
consideration a unique perspective of community associations 
will help the Federal Housing Finance Agency with its REO pilot 
program.
    I recommend that FHA take at least three actions to help 
homeowners living in community associations. First, FHFA should 
make sure outstanding liens and arrearages on the property are 
satisfied prior to sale. It seems to me as an owner in a 
community association, where about 25 percent of the taxpaying 
owners in the country reside, and in California it's over 33 
percent, that these packages of homes cannot be sold to 
investors in good conscience if the issue of unpaid back 
assessments and arrearages have not been cleared up.
    Second, FHFA can make sure that servicers are foreclosing 
and reporting a change in title in a timely manner. Completing 
the foreclosure process for loans that cannot be modified, and 
recording a change in title, will improve outcomes for both the 
GSEs and community associations. When the foreclosure process 
breaks down, assessments go unpaid for longer periods of time, 
more services have to be curtailed by the associations, and the 
resulting lack of maintenance and repairs can lead to declining 
property values.
    Third, FHFA must ensure that investor purchasers will 
understand community associations and the obligations of owning 
property in an association. Given the unique aspects of 
property ownership in a community association, CAI urges that 
potential investors be required to demonstrate experience in 
managing property located in a community association. If the 
investor doesn't have association experience, I believe it is 
appropriate to ask how they will acquire this expertise. We 
need responsible investor/owners in our communities. Investor 
ownership in neighborhoods that are designed for owner 
occupancy can be a source of frustration if the investor/owner 
does not take their responsibility seriously. Timely payment of 
assessments on properties by the investor directly into the 
association during their rental period or until sold to a third 
party is imperative. Reserving, protecting, maintaining, and 
insuring properties will be required by the association. 
Investors should understand that associations will want to have 
a copy of the lease on file and will need a single point of 
contact to resolve any outstanding matters. Investors should 
expect associations to be interested in the restoration of 
neglected properties.
    I will finish with a few observations. Lenders and 
servicers have failed to adequately preserve and protect their 
collateral before, during, and after foreclosure. Lending 
institutions that have not foreclosed on hopelessly delinquent 
owners have caused harm to community associations. Some of 
these owners stay in the property and pay neither a mortgage 
nor their assessments. Take my own association as an example. 
My small 48-unit association is professionally managed with 
educated and trained board members. We have had three 
foreclosures on two units, two short sales, and one delinquent 
owner still living in their unit. The accounts receivables of 
my association now exceed 60 percent of our annual operating 
budget. Expressed differently, our unpaid assessments total in 
excess of the amount one unit would owe over the course of 15 
years. This shortfall is due solely to these six properties. 
The monthly assessments for all owners has been raised in the 
past 2 years by 15 percent annually. Almost 75 percent of that 
increase is due to the nonpaying owners. The other owners in 
the association, including myself, have shared $54,000 in 
higher housing costs in the past year-and-a-half as a result. A 
number of our owners are on fixed incomes. One more assessment 
increase and some of my neighbors, who have specifically told 
me this, will have to sell or move out and rent their unit. 
They won't be able to pay their mortgage and assessment 
combined. We need a way to resolve problems like these in 
Enterprise and REO, and community associations will be eligible 
for this program.
    I believe implementing the policies I have recommended will 
improve returns for the Enterprises and provide some equitable 
treatment for the homeowners who have shouldered the financial 
burden of maintaining these properties. This is a critical 
issue for community associations and CAI members will continue 
to work as partners with the Federal Government to ensure the 
program's success. Thank you.
    [The prepared statement of Mr. Pruess can be found on page 
80 of the appendix.]
    Mr. Schweikert. Mr. Pruess, thank you so very much.
    Mr. Huizenga?
    Mr. Huizenga. Mr. Chairman, I appreciate this, and as I 
think I had explained, I need to duck out for a flight. I got 
stuck with the earlier not-so-good flight that my colleagues 
who had the foresight to make sure that they didn't come home 
earlier than I did.
    Mr. Schweikert. It's clean living.
    Mr. Huizenga. Is it? Okay. You Arizona guys, I tell you. 
Anyway, quickly, Mr. Dobson, and probably Ms. Kenney, directed 
to you, too, but I hear consensus on the panel, and anyone who 
has addressed this, that we need to move these inventories 
through and out of GSEs. Okay, you're both nodding. What I was 
hearing, though, is your concern, Ms. Kenney, is that, I think 
it was 99 properties that you suspect are available here in the 
Chicagoland area.
    Obviously, that was going to be one of my questions, where 
exactly? Because that's very different whether it's Amherst to 
North Shore to wherever they're gonna be. Whatever. Those are 
different areas and you seem to be calling for an intermediary; 
right, is that--
    Ms. Kenney. Absolutely. I think that there needs to be a 
localized approach. And I actually think that the State HFAs 
offer a perfect opportunity for that. My agency in turn is 
partnering with six local communities. And you're right, it's a 
distinct need in different communities, and I really question 
the ability of an outside investor that is just strictly 
profit-oriented to come in and manage 99 properties that we're 
told are scattered throughout the city.
    Mr. Huizenga. So, Mr. Dobson, as one of those profit-
driven--
    Mr. Dobson. Yes, it beckons.
    Mr. Huizenga. --companies that it's going to come in first.
    Mr. Dobson. Sure.
    Mr. Huizenga. Do we need that intermediary, do we need to 
have that or not?
    Mr. Dobson. I think it's--from our perspective, it's 
important to understand that there's a robust asset management 
infrastructure that exists in the United States today for this 
purpose. So, no one is--our business didn't say no one, our 
business plan is not to try to make those consumer-facing 
decisions at a central location. It's to engage local property 
managers. In the pre-purchase diligence states, to understand 
prepared budgets marketability, written equivalence, as well as 
to deal with consumers loan basis. So, as this mechanism is 
scaled up, that might be an opportunity for our company to 
expand into its own branches. But in the early phases, this is 
very much a hands-on, one-at-a-time asset. And it's worth 
noting that we didn't get into this crisis by any other way 
than producing one bad mortgage at a time. And we're not going 
to get out until we renovate and rehabilitate and produce and 
construct a producing asset one at a time.
    Mr. Huizenga. So, do we or don't we need to have this?
    Mr. Dobson. Our plan, we have been buying homes, our plan 
is to do it with the existing local for-profit asset managers. 
Housing is a very diverse asset class, so it doesn't mean that 
there's not a place for nonprofits, there's not a place for 
house advantage agencies, in certain segments of the market I'm 
sure that it will increase efficiency in certain sectors.
    Mr. Huizenga. So, it's not ringing hollow; right?
    Mr. Dobson. No, it's not ringing hollow.
    Mr. Huizenga. Yes.
    Mr. Dobson. It's not ringing hollow, but that level of 
expertise is needed and it's available.
    Mr. Huizenga. Okay. I appreciate that. And with that, I 
yield back, thank you.
    Mr. Schweikert. And, thank you, Mr. Huizenga. And fly safe.
    Mr. Huizenga. See you back in D.C.
    Mr. Schweikert. Mr. Schilling?
    Mr. Schilling. Very good. I just want to thank the panel 
again. Ms. Kenney, you had indicated that there was going to 
be, or I think they are doing it already, the $10,000 payment, 
$10,000 downpayment assistance. Have you guys done studies, for 
example, of showing, because I know that where you're trying to 
go is the end game of trying to get those things back up and 
running, somebody is in there living in them, of course. But 
have you done a study of the investment back on that $10,000, 
and then, like somebody stayed in the house for a specific 
period of time?
    Ms. Kenney. My agency offers a myriad of downpayment 
assistance, and did even prior to the crisis. And we did not 
see higher delinquency levels within that portfolio. Our 
portfolio was really affected, like everyone's, I think. We 
obviously did no subprime, I testified to that. But we saw, 
actually, we had very low rates in delinquency, probably 
through 2009 and into 2010, like 1 or 2 percent in our 
portfolio. And it was only the unemployment that really 
triggered that. So, we do have some historical experience with 
that. And I should note that I only have 5 minutes, but it's a 
very specialized program. And the communities are very much 
involved, and we have pre- and post-purchase counseling that's 
associated. The homeowner is actually connected to a counselor 
through that process, as well. So, it's something that--it's 
obviously part of a pilot program that was launched by the 
Governor, but that we're going to monitor very closely. So, we 
had probably 12 reservations under the program, and it's been 
for like 30 days. I think early signs are that it has provided 
some incentive. Vacant homes don't sell; they don't show as 
well. So, it has provided some incentive for people to take a 
second look at these vacant properties.
    Mr. Schilling. Very good. One of the things--I was born and 
raised in the west end of Rock Island, where there's a lot of 
houses that I have seen them put well over $100,000 into these 
houses, and the market value there is $40,000 to $50,000. 
Sometimes we're better off to kind of just level those, some of 
the houses that are out there, rather than to continue to 
rebuild those. But anybody can answer this one, I guess. Do you 
believe that the pilot program will be successful? Mr. Dobson?
    Mr. Dobson. I believe it will. I think that there's 
significant investor interest. And I think that it will help 
allay some of these fears about the complexity of the 
prepurchase diligence and the operations.
    Mr. Schilling. Okay. How do we judge success?
    Mr. Dobson. The ultimate judge will be the improved home 
prices, and consumer confidence around housing, and building 
and economic activity. And I don't think that this is some 
lofty 10-year measure, this is something you'll see rather 
quickly. Home prices usually react favorably to a net lower 
cost accounting.
    Mr. Schilling. I do agree. We have to figure out some way 
to get a floor on all this so that we can get our market back 
up and rolling. And then if it is successful, however we 
measure success, which I think you'll probably be able to get a 
pretty good idea, should we expand into other localities 
across-the-board?
    Mr. Dobson. I think we should. I think this is a cross 
section of every market. This isn't a geographically focused 
issue. This is a--There's a point in time when investor--when 
consumer base simply doesn't qualify for mortgage in the volume 
that's needed to absorb this real estate. So, as this program 
should expand, it should probably be more focused on the kinds 
of assets that are involved, the price points and some assets 
that vary in cost and care, like economy and some things. But I 
think it absolutely should be expanded, and where institutional 
investors can compete with private, with individual investors, 
then they should be allowed to compete.
    Mr. Schilling. Very good. I'm kind of torn, because both of 
these, I like the idea because it still gives some of the most 
vulnerable, with what Governor Quinn is doing, with helping 
out, but at the same time, we're helping put that floor down. 
And so, I'm going to go ahead and yield back.
    Mr. Schweikert. Thank you, Mr. Schilling. Now it's my turn. 
Sorry, this is one of the most important subjects in my world. 
Do I still have someone from the GSEs in the back listening? 
All right. In that case, we're going to have to send a note.
    Mr. Pruess, one of the single, biggest complaints I have in 
my congressional district office back in Scottsdale, is we have 
lots of ``A'' choice, and I had very close relationships, I 
have been the county treasurer and helping them with their 
common areas and those things, is coming in and saying, we have 
a house--the folks have been under foreclosure for 3 years, 2 
years, they haven't paid an HOA payment in that time, why won't 
they do the foreclosure? We need to start having them pay their 
fair share, because everyone else now is having to cover the 
lack of their HOA costs. In California, like in Arizona, when 
there's a foreclosure it severs any of the HOA liens you have 
placed on the property; is that also true in California?
    Mr. Pruess. It's true if it's a trustee sale or the 
foreclosure itself goes through. If it goes to a short sale, 
then generally what happens is the lending institution will 
negotiate with the board. If the bank takes its percentage of 
the money which they wanted, and it's agreed to, then they're 
asking the association to give a like percentage.
    Mr. Schweikert. So, in your particular case, when they take 
forever, or an elongated period of time to finally pull the 
trigger and execute the foreclosure--
    Mr. Pruess. We're trying to get a paying owner in the 
building. That's the biggest problem.
    Mr. Schweikert. And this is one of those unintended 
consequences. I have a couple of HOAs, actually, one in central 
Scottsdale, it's been there for many years, that literally is 
in major, major trouble because everything that goes up for 
sale sells, but they have a handful of properties that have 
been under foreclosure and they're both within--the GSE is 
waiting to pull the trigger to do the foreclosure. And they're 
going on, I think, 2, 2\1/2\ years now, for some, and we can't 
get an answer why they won't do the foreclosure.
    Mr. Pruess. Those 15 years I mentioned, we have one owner 
who is still living in his building, in his unit. He bought his 
place for $500 down, which is--it's a crime, but people were 
allowed to take out loans like that. He wasn't qualified; he 
was a musician.
    Mr. Schweikert. But I guess the point I was trying to go 
to, and seeing if you agree, is sometimes the inaction from the 
GSEs, or whoever, whoever the servicer is, because in some ways 
we blame the GSEs, but reality is something in the servicing 
process, so I always have to be a little careful to blame those 
in the process. They don't understand the unintended 
consequences of what they do, also, to the rest of the 
neighborhood, let alone the HOA.
    Mr. Grossinger, you made the comment about--now, I 
understand your experience was also in buying impaired paper, 
and having been around part of that business, yes?
    Mr. Grossinger. Yes.
    Mr. Schweikert. You have that 20 percent of the paper 
that's unsavable. That you just say, write it off. But when 
you're buying hard asset, hard real estate asset, a handful of 
you cannot walk away from a handful of houses that devastates 
the cap rate. Would you then agree, though, that if they're 
going to do the bulk sale, then they need to make a mechanic 
where those properties that are the problem actually need 
additional love and attention, or they need to be major 
rebuilt, that there needs to be a very simplified process, that 
if you and I went out and bought 100 houses, we have these 6 
over here that are scattered and they have problems, that we 
need to be able to sell them to the family or the individual or 
another investor who is willing to rehab them, do whatever with 
them.
    Mr. Grossinger. I think also, and all of my knowledge in 
this area comes from the interviews we did with the private 
equity firms as we were both setting up the Mortgage Resolution 
Fund with the Illinois Housing Development Authority, but also 
as we now have entered into this partnership with the private 
equity fund to do what we think is important, in those markets 
that we think the private sector will ignore or not just--
    Mr. Schweikert. But you agree that there needs to be at 
least a clean process to sell the brain-damaged properties?
    Mr. Grossinger. I think it's actually more than that. I 
think if we had either--and Mary called it an intermediary, you 
could call it a partnership without any sort of legal 
partnership, if you understood that those six problem children, 
some of them may need demolition. When a bulk sale is offered 
up, there are going to be winners, there are going to be 
moderate winners, and there are going to be losers. We just 
want to make sure that the losers aren't being ignored. And so, 
if there's a different disposition strategy than a hold and 
rent for a period of time, if demolition is the right 
disposition strategy, if it needs a little more activity to 
sell to a homeowner, I think any of those should be--
    Mr. Schweikert. But wouldn't it be natural economics to 
say, hey, if I'm paying property tax on the improvement of this 
property, and there's no way I'm going to rent it, and my rehab 
costs, and I can't get my rate of return, we run the tractor 
through it so at least I minimize my property tax exposure. 
Isn't there some basic law of economics that's going to help 
me--
    Mr. Grossinger. That's exactly what I was saying. There are 
many, many properties for which the outcome shouldn't 
necessarily be predetermined. There should be some way for the 
bulk buyer to be able to come back and say, here are the 
economics on this particular house. There is no way in this the 
neighborhood, I would have to put $100,000 into this property 
and I would get $400 a month rent. Look at the number of vacant 
properties, let me demolish it. There should be some 
conversation along those lines. But it needs to be a 
conversation, not a fiat.
    Mr. Schweikert. I think you and I are pretty much saying 
the same thing. I think actually it also happens just from 
rational economics. In our world, every time we--our average 
was for every 100 houses we bought, we had 1 or 2 that we had 
to get off our books. There was no way I could afford to re-
pipe the house or this and that. But I always had other people 
lined up. And often, we would take little hits on them, but we 
got them off our books because we had to cover our costs. We 
actually even had one that we made a deal and sold under our 
cost to one, the nonprofit church-based housing groups in our--
in a neighborhood because they wanted it and I didn't. So, I'm 
hopeful that there are actually some rational economics that 
also make that happen.
    Mr. Grossinger. There has to be some decent discussion on 
it. There are some national entities being formed between some 
of us national nonprofits. To be able to take those lowest of 
low-value properties and do something, there are land banks 
being informed.
    Mr. Schweikert. Good.
    Mr. Grossinger. But the conversation has to take place.
    Mr. Schweikert. The land banks almost become sort of--it's 
something that stands on its own. I found on some of the small 
properties I would find, a little--a family would come to me 
and say, look, we're going to do it. And that was their--Ms. 
Kenney, right now in Illinois, if today I receive my notice of 
foreclosure, and this is a judicial mortgage State; correct?
    Ms. Kenney. It is.
    Mr. Schweikert. What would the mean time be for that 
foreclosure to be executed or the investor's property rights in 
that loan instrument to be executed?
    Ms. Kenney. It depends on where in the State it's filed. In 
Cook County, it's particularly long. There's a foreclosure 
mediation program that I think is pretty--
    Mr. Schweikert. In Cook--let's take the worst-case 
scenario.
    Ms. Kenney. 18 to 24 months, probably.
    Mr. Schweikert. Okay. So, 24 months, which is actually 
better than I thought it would be. Two years?
    Ms. Kenney. Yes, I would say that's right.
    Mr. Schweikert. Because of that type of mechanic, should 
Illinois lenders require higher interest rates because there's 
an additional risk premium because of the legal process here?
    Ms. Kenney. I'm sure it's something that lenders will start 
to look at. I don't think that people ever anticipated the 
prices as they exist today. And part of the delay was caused by 
lenders. And Bank of America seized foreclosures in October of 
2010. No offense.
    Mr. Grossinger. None taken.
    Ms. Kenney. October of 2010, and I think just started 
resuming a portion of the foreclosures just in January of this 
year. So, it wasn't all imposed by the process, per se. But I 
think that you make a fair point. I think that the economics of 
it are such that Illinois will start to look at those issues. 
And Illinois is not the only State with that issue, obviously.
    Mr. Schweikert. And two last ones. Mr. Grossman, you also 
made the comment about Maricopa County, but if you and I would 
step back to, yes, let's go 3, 3\1/2\ years, people thought 
people like me were insane for going out and buying property, 
after property, after property, because Maricopa County is 
never coming back, there are huge numbers of houses, we're so 
overbuilt. You have a decade of inventory. Now, we look smart. 
But would you be willing to debate me just a little bit, is in 
the deed of trust State, some of these States that had--I'll 
use a more aggressive deed of trust, foreclosure mechanics, 
that by moving inventory actually helped a stimulative effect, 
but also got rid of--I used to have a housing professor who 
said, ``We all grow up here, the world moves in supply and 
demand, and in housing it doesn't. In housing, it's 
anticipation of supply and demand.'' And if I'm always 
anticipating another wave of foreclosures, it--yes, it's neat 
because I get to control the timer--that actually that's one of 
the great sins in many of the marketplaces around the country, 
is they're not doing those things to mitigate the anticipation 
of the future supply.
    Mr. Grossinger. I think if you go back historically to the 
protection of individual property rights, and some States took 
that more seriously and put in more protections and more 
protections, and longer redemption periods and more 
protections. I do think here in Cook County there is--the 
recent recognition is really devastating when it comes to 
vacant properties. And so, for Cook--there is a bill in 
Springfield right now to create a fast track foreclosure 
process for vacant properties. One particular servicer has 
negotiated with the chief judge of Cook County to do fast track 
foreclosures on vacant properties. I will give you one 
statistic.
    Mr. Schweikert. And if you come across that article, I 
would love to see that, because I appreciate that information.
    Mr. Grossinger. Sure. Bank of America, my former employer, 
right now has 1,800 vacant properties within the City limits of 
Chicago; 90 percent of those are pre-foreclosure. So, they 
can't do anything with them even if they wanted to. We're 
trying to work with them to change the judicial foreclosure 
process for those vacant homes. And in that regard, as a former 
legal aid lawyer, I can step back and say, I don't have to 
worry about individual property rights to the homeowner, 
because there isn't anyone living there.
    Mr. Schweikert. But in many ways, you're also speaking to 
the HOA problem.
    Mr. Pruess. I will give you some quick statistics in--but 
we're a nonjudicial State in California. From date of notice of 
default until date of sale, it's 311 days, is the average today 
in California. And because of rules out there, over 60 percent 
of the units that go to sale on the courtroom steps, go back to 
the bank. They have so many rules that you can cancel them for, 
that it would go back to the bank. It's only roughly 10 to 11 
percent of the units that get sold to a third party, which is 
usually an investor. And the investor's time, then, to sell, it 
runs, I believe it's something like 134 days. If the bank takes 
it back and they go to resell it again, their time is 184 days. 
So, if you add the 3 of them together, and they finally sell it 
to the investor the second time around, and the investor sells 
it, you're looking at just under 2 years of time.
    Mr. Schweikert. But the moment the foreclosure happens, 
the--in your case the HOA fees are attached to the property, 
whether it is owned by the bank or an investor.
    Mr. Pruess. Not--
    Mr. Schweikert. No, they would have--they run with the--
    Mr. Pruess. But then it's the--
    Mr. Schweikert. The foreclosure is the severing instrument. 
And once--I'm the bank and I own it, I have taken--it's REO 
property, I owe you the HOA.
    Mr. Pruess. That's what the law says. And I hope you have 
been able--had a chance to look through these pie charts that 
are back here, because you'll see how bad these banks have been 
performing--
    Mr. Schweikert. But the banks--
    Mr. Pruess. --on doing what they're supposed to.
    Mr. Schweikert. So, you're saying, but the banks owe it, 
but they're not paying.
    Mr. Pruess. They're not paying.
    Mr. Schweikert. Okay. That's a--one off issue.
    Mr. Pruess. And I know that--the State and Federal level, 
that they are performing. But they're not performing. They are 
not performing.
    Mr. Schweikert. Because the foreclosure is the severing 
activity.
    Mr. Pruess. I have had the privilege of meeting Mr. 
Manzullo in a unit that he was trying to buy in Pasadena. And I 
have two Countrywide homes owned by Bank of America, so--
    Mr. Schweikert. We can have some side stories.
    I'm going to let Mr. Schilling--he had a couple more 
questions, and then I want to finish with one or two for Mr. 
Dobson, and then we'll let you go back and dance in the rain.
    Mr. Schilling?
    Mr. Schilling. Very good. I think this one could go to my 
Hawkeye friend here. Do you believe that investors are willing 
to partner with the local community-based organizations to help 
to stabilize and improve the market conditions?
    Mr. Grossinger. Some are, some aren't. I think--I remember 
Meg Burns said something like they're looking for investors who 
want to be profitable yet civic minded. And I'm not sure what 
that means, but in my conversations and travels, I think there 
are a number of private equity funds out there that recognize 
that there's value added by partnering with organizations that 
understand things at the block-by-block level. Because real 
estate in cities like Chicago can change dramatically within a 
three-block radius. So, I do, I think there's enough out there 
to make it. Where those partnerships are going to work, it's 
going to be very successful. And it doesn't have to be--what 
we're doing with our newfound partner is an actual economic 
partnership where we're building a fund together and we'll act 
in a 50/50 partnership. It doesn't have to be that. But in an 
advisory capacity, or in some form taking the skills the 
nonprofit brings to bear, the HFAs bring to bear, only makes 
the business model better, to be honest.
    Mr. Schilling. Very good. And then, where do investors 
expect to obtain financing for these purchases? I guess anybody 
could answer that.
    Mr. Grossinger. Oh, it's all the silly money that's 
floating around in this country. Billions and billions of 
dollars is looking for a better return than in a CD.
    Mr. Schilling. That's not hard to do.
    Mr. Grossinger. No.
    Mr. Schilling. Okay. With that, I yield back.
    Thank you, sir.
    Mr. Schweikert. Mr. Dobson?
    Mr. Dobson. Yes, sir.
    Mr. Schweikert. Over the what, 3-year period, how many 
units have you acquired?
    Mr. Dobson. We will have purchased about 260 to 270 units.
    Mr. Schweikert. And what do you think your capacity and 
appetite is?
    Mr. Dobson. Now, it's tens of thousands.
    Mr. Schweikert. Do you care when taking down an individual 
property or package, whether they're already leased or vacant?
    Mr. Dobson. The already leased properties require a certain 
level of management that the empty properties do not. So, I 
think that you have to understand what goes into that. But, by 
and large, they are more attractive properties and more solid 
properties.
    Mr. Schweikert. Your model, are you holding the properties?
    Mr. Dobson. This is a long-term, yes, sir.
    Mr. Schweikert. So, in many ways you're trying to build an 
annuity, or a rental.
    Mr. Dobson. Right. We think that this is a new asset class.
    Mr. Schweikert. Yes.
    Mr. Dobson. The mobility in the markets blazed a nice 
trail, and the capital has not been in the sector for a long 
time, because mortgages basically displaces economically 
returned capital.
    Mr. Schweikert. So, you're approaching it as an apartment 
building, just with geographic separation.
    Mr. Dobson. Very long hallways.
    Mr. Schweikert. Yes, very long hallways. And, actually, 
that is a running joke in our side of the business.
    Mr. Dobson. Right.
    Mr. Schweikert. So, obviously, you get the humor in that. 
Have you had the experience of when you have acquired a 
property that has been recently foreclosed on, have you 
participated actually in being on the bidding side?
    Mr. Dobson. Sure. Sure.
    Mr. Schweikert. Have you had the experience of keeping 
former owners in the properties?
    Mr. Dobson. Yes.
    Mr. Schweikert. Share with us your experience.
    Mr. Dobson. Sure. In Phoenix, we purchased homes right off 
the courthouse steps. And we really dispatched--
    Mr. Schweikert. I'm so glad you're not my competitor. I had 
to give up the business because of that, so--
    Mr. Dobson. It has become quite a feverish market. But we 
really dispatch someone to the home, and oftentimes the 
homeowner is still there. We present them with a lease 
application, more often than not they qualify, and they stay. 
So, the unfortunate part is because of this plan to draw out 
the liquidation cycle that was at the Federal level, many times 
the homeowner has given up before the foreclosure.
    Mr. Schweikert. This is a pretty powerful point, and I wish 
people would listen. I'm sorry to be speaking in first person, 
but about 20 to 25 percent of our tenant base were the former 
owners, with hope one day to buy the property back.
    Mr. Dobson. That's right.
    Mr. Schweikert. And they wanted their kids to still go to 
the same school, and their mother-in-law lived across the 
street, which might have been a reason to leave, but, and yet 
because of the way you were acquiring properties, you were able 
to get to the--even though there's that horrible emotional 
experience--
    Mr. Dobson. Right.
    Mr. Schweikert. --but create some lineage of stability 
where there's relationship to the property.
    Mr. Dobson. And we think that would have been much more 
successful had we been able to purchase the properties when the 
homeowner was 6 or 8 months delinquent, and it was apparent how 
the story was going to end. If we buy homes after the homeowner 
has been delinquent for 18 months, many of the homeowners have 
already made plans and vacated their properties.
    Mr. Schweikert. By saying that, you're also making the 
argument for if you--if you cannot mitigate it, there's not a 
short sale, there's not ability to rebuild the loan, then the 
stabilizing factor is move to the inevitable sooner.
    Mr. Dobson. Many of these homes we purchased for $100,000 
had $300,000 mortgages on them. The homeowners were paying 
$1,800 a month for the first mortgage and $300 a month for the 
second mortgage. We leased the home back then, for $850 a 
month. This is a traumatic situation, but it's--for the 
homeowner to just sit and suffer and service this $300,000 
worth of debt would have broke them over time. So, in essence, 
a lot of what's happening on the ground level is a very 
rational decision from homeowners to no longer support the 
unsustainable and irresponsible level of that.
    Mr. Schweikert. On your average property that you're 
acquiring, and you're obviously acquiring in the Maricopa 
County markets, and I don't know what other markets, your 
average takedown, how much in rehab are you doing to each 
property?
    Mr. Dobson. We're spending about $8,000, and it's just an 
average, I would say that we really either spend--
    Mr. Schweikert. Ours is about $6,700, sorry.
    Mr. Dobson. Right. So, about $8,000. And we tend to either 
spend $3,000, or sort of $18,000 or $20,000, which seems to be 
pretty big, a pretty big barbell there. But it's an extensive 
rehabilitation, because the rental markets are unbelievably 
competitive. We pride ourselves in the data that we gather and 
we're able to get down some interest and infrastructure is 
driving this thing.
    Mr. Schweikert. So, with that variance, literally for every 
hundred houses you're buying, you're ultimately spending--
    Mr. Dobson. About $1 million.
    Mr. Schweikert. Yes, $800,000.
    Mr. Dobson. And local, that's not a big investment, for 
every 100 homes.
    Mr. Schweikert. Okay. As we get ready to close the panel, 
anything that we have not heard and put into the record that 
the panel believes we should share at this point?
    Thank you for participating. I must tell you, each of you 
have some things I'm really interested in, I may be sending you 
some notes and asking you to comment for the record.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to these 
witnesses and to place their responses in the record.
    The hearing is now adjourned.
    [Whereupon, at 10:55 a.m., the hearing was adjourned.]


                            A P P E N D I X



                              May 7, 2012



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