Ask ten different commercial real estate investors about their prospects for the market and you may get ten different opinions. While the residential real estate market definitively rebounded in 2009 – thanks primarily to an open monetary policy spigot and a overflowing fiscal trough – the commercial market has been anything but a clear picture.
What does the landscape for 2010 look like? Investors must continue to hope for sustained easy money and federal spending to prop up the residential market. Commercial real estate investors must do the same with an added beta due to the increased uncertainty.
The REO segment could be the best bet for real estate investors, and will likely remain so until the market returns to more normal conditions. Several years down the road may be a different story assuming maturation of existing bundled securities and an anticipated long term recovery. Until then, REO may be the way to go.
A REO (Real Estate Owned) property is one that is returned to a mortgage company after a failed foreclosure auction. A property that is diverted to an auction is most often one that the owner was unable to sell to a third party and must relinquish back to the mortgage holder. During times of severe financial stress surrounding the real estate market, mortgage holders may have increased difficulty reselling the assets. An initial bid at an auction would typically comprise the remainder of the principal on the loan, accrued interest, and other costs. If the auction is unsuccessful, the property will remain in the possession of the lender.
The bursting real estate bubble during the mid-to-late 2000s forced banks, financial institutions, and government-backed agencies, amongst others, to repackage non-performing assets into securities and sell them quickly in order to clean up the balance sheet. When these money centers have to quickly disperse non-performing assets to third parties, business booms for firms specializing in REO asset disposition. Obviously, lenders do not want to dump assets cheaply. But the financial crisis forced mortgage originators to get toxic assets off of their books as expediently as possible.
Major loan originators like Fannie Mae, Freddie Mac, and large commercial banks are often the prime dealers which REO firms service. When these big lenders have a lot of assets on their books, the value of REO servicers is amplified. REO specialty firms assume relatively little risk compared with the loan originator and can reap huge gains if they are successful in disposing of the transferred assets.
