Obama’s Bulk REO Plans
At the beginning of the year, the Obama Administration announced a pilot program to sell government owned foreclosures (REO’s) in bulk to investors. Fannie Mae, Freddie Mac and the Federal Housing Administration currently have somewhere around 250,000 foreclosed properties on their books (don’t quote me on the exact number). While California has seen some stabilization in the number of foreclosures, a lot of the rest of the Country is just picking up speed when it comes to defaulting mortgages. The bulk sale program was announced as an effort to unload the current inventory in preparation for the large future inventory. The bulk sales are intended for investors that will hold the properties as rentals; in an effort to get them OFF the market and stabilize home prices.
When I first heard about this, I thought to myself, “I wonder what it would take to get funds together to get involved… there is potential for a LOT of money to be made”. It turns out it would take somewhere around $50 million more than I have access to. Shoot. Just a few days ago, 2 GIANT funds stated they were planning to commit $1 billion a piece to these bulk sales (yes, billion). Other funds are planning to commit similarly huge amounts of money to this. It is fair to say the average investor will not be taking part.
The plan could however further involve the average tax payer. One CNBC online columnist pointed out that financing for these purchases will be limited (due to the buyer’s lack of experience managing these rental types). No one will be surprised if the government creates a subsidy for the investors (guaranteeing a portion of the loans made to the investors). If that happens, we will have put a system into place that allows investors to make a private profit while the taxpayers subsidize the risk. I am going to go out on a limb here and say he may have a point. A link to the article is at the end of this blog.
So, the questions of the hour include: How will this affect our housing market? How will this affect our rental market? And who will see the benefits of the program? I’m not a political or economic genius so I am not going to say I have the end-all answers to these questions. Here are a few of my initial thoughts on the matter:
1) How will this affect our housing market? Let’s be honest, I’m not 100% sure. From what I have read it sounds like the plans are to focus on areas where the highest number of future foreclosures are expected. In Southern California, we are not on that list. If only a small portion of the homes are in our area, we may not see much affect either way in our area.
2) How will this affect our rental market? Please see the comments above. If there are not substantial sales in our area, we probably won’t see changes. If there is a concentration of homes in any particular area, we would expect rents to drop in that area due to the new supply of available rentals.
3) And who will see the benefits of the program? I think it is safe to say the big investment firms will benefit from the program. I am hesitant to say the general public will be pleased with the results. Transferring the inventory may just delay the homes hitting the market. Managing SFR rentals can be costly and time intensive. In general, these large investment firms have no experience with it. If the firms sell these properties a couple of years down the road, we are back in the same boat (and they bought them at a discount so they don’t need a stellar economy to justify the sale). There is a good portion of online readers that believe Obama will benefit from the deal through campaign donations from large investment firms. Hmmm.
In general, the reviews I’ve seen of the program have been one sided and NOT to the side Obama was hoping for. Here are a few of the public comments I have seen posted online:
This is WALL STREET vs MAIN STREET all over again. Why would the government need to sell these properties in large quantities? It just shows how much control WALL STREET has on the politicians.
The only groups that could participate if they sell these in large bulk sales are hedge funds, private equity funds, etc.The residential RE market is a very efficient market where selling as individual sales or up to 20 properties would allow the most LOCAL competition and get the highest sale price too.
Do we really need hedge funds/private equity funds buying up our neighborhoods and profiting from all the distress? Why not have a format that allows the locals to participate? They will create the most value and jobs for the local neighborhood and local economy.
I can’t believe how rigged the game is. The same a-holes that caused this mess are raising billions of capital to purchase these 100 million dollar bundles of houses 50% less than current market cost that small individual investors would pay. They are going to get these houses so cheap and manage these rental assets so poorly it is mind blowing. Still making huge profits because of cheap money and low basises. They will only need to carry these rentals for a couple years before they start to sell them. When the excess inventory is gone, prices will push up fast b/c prices are already below rental equilibriums and replacement cost. Why not open up credit markets to single family rental housing and allow individuals to finance more than 4 houses. Fannie and Freddie will take less losses (better for the tax payer) and the properties will be managed better. (better for the tenants and cities) It will spread wealth out to thousands and thousands of small investors instead of high end finance guys.
If this is anything but a public auction, it will be rife with corruption. Way to easy for this administration to guide quality properties into the hands of those they have yet to pay off.
Neighborhoods and the single family homes they comprise are now viewed as an asset class that can yield a great cash flow. An asset class brought about by a flawed financial system five years ago and now ripe to be exploited once again by that same financial system, for the next five or so years. Once the profits have been gleaned private equity can “exit” by bundling this asset class as an investment trust (cdo?) and sell them off to the market…once again. We learn nothing.
Corruption at it’s finest? Picking the winners and losers. Welcome to corrupt America where campaign contribution equal a get out of jail free card?
Bless My soul “Obama’s going to make the rich richer and the poor to give the rich more rent.
As many posters here realize this is nothing more than an outrageous rip off of the average taxpayer. Another back door bailout of the banks. Another here’s a larger share of the pie to the wealthy elite. An absolute negation of the free market. A greater insult to the common American could hardly be imagined. I am astounded that such blatant corruption could even be suggested. If this does not start a revolution than nothing will. My God! the criminality being displayed by the politicians in this Country could not be more extreme.
Only Wall Street Banks, Hedge Funds, and Private Equity Funds have enough capital to buy foreclosed properties in huge bulk sales. Why would we ever need to sell residential real estate in huge bulk sales? Residential real estate is a very efficient market with lots of qualified investors in all markets.
The problem is almost no real estate investors can get financing to purchase rental property.
I really thought Obama was going to help bring back the middle class. Its shocking to learn about a program that would allow Wall Street an opportunity to capitalize on the residential market they helped crash but not afford that opportunity to the rest of us.
And this guy had a whole new idea for solving the issue…
If the goal is to reduce supply, then selling the houses in bulk does nothing. It merely transfers the excess supply to very large investors under a formula to almost guarantee profits. It does nothing to correct the markets. A much more direct and effective program would be to simply destroy the appropriate excess supply. This would help the entire market and stabilize prices. A pilot program in critical areas would immediately impact the markets. Numerous positives would result. It’s a simple solution, but unfortunately does not present a large investor opportunity. Too bad.
It’s clear to see there is a lot of public concern over the program in general. If you see positive public comments regarding the program, forward me the link and I will add them to help even out the tone of this blog!
Please note, all public comments were taken from the following articles:
http://www.cnbc.com/id/45928213
