REOs & MCCs: Not Just Alphabet Soup
Not too long ago, Real Estate Owned (REO) properties were viewed as a small portion of a bank's portfolio. Real estate agents rarely dealt with lenders who had REO stock and had very few buyers interested in HUD homes. The situation has reversed recently and with the current housing market struggling, REOs have become big business for lenders but not necessarily in a good way. The term REO references properties a bank acquires due to foreclosure and this results in a negative financial impact, as they must maintain these vacant houses until they are resold, usually at a financial loss. Considering the numbers of foreclosed properties banks now hold in inventory, keeping the utilities and the taxes paid is an enormous expense. Banks are relying on real estate agents to showcase these homes to potential buyers in order to get them off their books.
Purchasing an REO property takes longer than a normal real estate transaction. The stringent loan approval process and meticulous attention to detail can be time consuming and it may take awhile to get into the door of your new home. Dan Brady, a Loan Officer with Ross Mortgage in Cincinnati said, "Lending institutions many times are out of state and are unfamiliar with Ohio's laws regarding transferring title and power of attorney registration requirements." Brady also mentioned that with the high number of foreclosures, banks are now selling these homes to investors through short sales, increasing the number of rental properties in neighborhoods and creating a potential negative impact on communities.
On a more positive note, homebuyers who are considering purchasing an REO property are contributing to the revitalization of neighborhoods and strengthening of communities. The Mortgage Credit Certificate (MCC) Program from OHFA can be used to the advantage of a buyer by providing a dollar-for-dollar tax credit reducing their mortgage interest 30 percent, up to $2,000, each year they are in the home. The MCC Program also allows buyers, rather than investors, to purchase these properties increasing homeownership, which ultimately helps to stabilize and improve property values of neighborhoods. Brady also mentioned that "many first-time homebuyers are able to purchase houses and make payments that are less than what they were paying in rent, before the MCC credit is applied."
Additionally, buyers interested in purchasing an REO property from a bank's inventory will find the property vacant and easier to inspect. The downside of this is that REO properties may have stood vacant for a long period, can often be in a state of disrepair, and are usually sold 'as is', although some banks are willing to provide minor repairs/investments to the home to make it more appealing. Brady stated that the process works very well with OHFA's MCC Program. Lenders hope to finance more homes through the MCC Program while there are still funds available.
OHFA has designated $12.5 million for the MCC Program and there are still funds available under the set-aside for REO purchases. Interested borrowers should contact an OHFA MCC-approved lender today.