Selling foreclosures in bulk to institutions is an example of crony capitalism at it’s worst. Keep in mind that our problem isn’t that selling homes locally and individually doesn’t work, it’s that Fannie Mae, Freddie Mac, the FHA, and TBTF banks simply haven’t been doing it.
Diana Olick reports:
The Obama administration, in conjunction with federal regulators and led by the overseer of Fannie Mae and Freddie Mac, is very close to announcing a pilot program to sell government-owned foreclosures in bulk to investors as rentals, according to administration officials.
Late-stage delinquencies still in the pipeline number close to two million, according to a new report from Lender Processing Services. Foreclosure starts outnumber foreclosure sales by two to one and “the trend toward fewer loans becoming delinquent, which dominated 2010 and the first quarter of 2011, appears to have halted,” according to LPS.
Knowing this all too well, the Treasury Department, Federal Reserve, HUD, FDIC, Fannie Mae and Freddie Mac, with their conservator, the Federal Housing Finance Agency (FHFA) at the helm, are engaged in a collaborative effort to face this new wave of foreclosures head on and figure out a way to keep these properties from sitting on the books of the government and sitting empty in the nation’s neighborhoods.
Larger investors want to be able to get real scale in any government program, in the range of 50, 100, 500 properties per deal, or $1 billion-plus in assets, say officials close to the plan. That’s why the government is looking to test a combination of different approaches. Fannie Mae did a $50 million sale last June, but that was on the small side. Officials are evaluating at what larger asset sales beyond that would look like.
“We expect several pilots that will involve both local investors and institutional investors. The goal here is to reduce supply by converting foreclosed homes into rental units,” says Jaret Seiberg of Guggenheim Securities. “Less supply — even less fear about a flood of foreclosed homes hitting the market — could stabilize [home] prices.”
Let me say this as clearly and simply as possible: THERE IS NOTHING WRONG WITH THE TRADITIONAL WAYS THAT FORECLOSURES HAVE BEEN REPOSSESSED AND RESOLD TO INVESTORS OR OWNER-OCCUPANTS.
Selling foreclosures locally and individually has big advantages:
- Local families and individual investors can buy them
- Each property receives individual attention, assuring the best market price for the bank
- Most buyers are quickly fixing-up their new homes and getting them occupied as quickly as possible
- Once the home is resold, Uncle Sam and/or the bank is out of the picture. Their role is done.
- Local folks have an equal opportunity to buy foreclosed homes, often at a price where they could fix them up and earn some “sweat equity”
The current process is a fair, free-market solution where everyone has opportunities to participate. And, it works just fine. It only “stopped” working back in 2008 when the first official foreclosure moratoriums began, followed by three years of Uncle Sam mucking things up. Today, thanks to all of the moratoriums, delays, and other shenanigans, there is an enormous backlog of homes in foreclosure on our TBTF banks’ books.
Even with this huge backlog, we don’t need to invent a new solution. All of the infrastructure is still in place from back in 2006-2008 when foreclosure activity was so high. Trustees could handle more business. The asset management companies are ready for it. Local real estate agents could handle the new business. Local investors are ready. And would-be first-time homebuyers all around the country would benefit hugely from it.
But Uncle Sam is deciding instead to sell hundreds of thousands – and potentially millions – of foreclosures to a small number of institutional investors. Their rationale? That somehow this will help “stabilize home prices.” This, of course, is populist hogwash. Consider these thoughts:
- Investors who buy in bulk only do so to achieve a bulk discount.
- It is a lie that banks will end up netting more cash from this program.
- Unless, of course, taxpayers are somehow supplementing their losses – which I’m sure we will be.
- That bulk discount is effectively a wealth-transfer from taxpayers to these institutions.
- Institutional investors will not care for homes as well as small, local investors or owners.
- It is therefore a lie that local neighborhoods will somehow be better off because of this.
- Details are fuzzy, but it is expected that some or even most of these homes will be required to be rented out by these institutions for a period of time, before they can be sold.
- It is absurd to think that large institutions will be better landlords than small, local investors.
- Uncle Sam will no-doubt impose all kinds of one-size-fits-all rules and guidelines that will end up being counter-productive in many situations.
- Nobody is better off. Not homeowners in foreclosure. Not potential buyers. Not local investors. Not renters. Not neighborhoods. Not anyone who makes a living in the real estate industry. Not taxpayers.
As far as I can tell, there are really only three potential winners. Sort of.
- The Obama Administration: they get to announce some sort of big, bold program before the election.
- Stocks (sort of, maybe): The stock market hates uncertainty and if this was pitched as somehow “solving the shadow inventory problem,” stocks could rally, even for just a short time.
- The Institutional Investors: Who, of course, will make many billions from this program – billions that should have been shared by small investors and homebuyers around the country. Prediction: expect massive fraud and uncovering of insestuous relationships between the institutions, banks, lobbyists, and politicians.
This is an absolute travesty. Does anyone really doubt that this entire plan was drafted by lobbyist of the big institutions who would profit the most from this? And that those institutions have ties to Goldman Sachs and all of the other financial firms who helped create this mess in the first place?
This will do nothing to stabilize home prices. And any short-term boost to consumer confidence will be quickly eroded once all of the inevitable fraud and mismanagement starts to get reported. And once people realize that home prices are falling anyway.
This is just another lobbyist-drafted program to fleece you and me. All because we are willing to buy any piece of crap legislation sold to us in the name of propping up home prices.