Posts Tagged ‘REO properties’

Could Wall Street Save the Housing Market?

Wednesday, July 25th, 2012

What will solve the housing crisis? The Keynesians think it’s a government bailout and the Hayekians think it will ultimately be the invisible hand and spontaneous order of supply and demand that will ameliorate the underwater single-family home sector. Well, could it both? In other words, the government steps in to structure a private sector solution?

On the heels of Bloomberg reports that Blackstone Group, the private equity giant and the country’s biggest buyer of real estate, has spent more than $250 million this year buying foreclosed single-family houses with plans to put them up for rent, we have more indications that large, yield-hungry Wall Street firms may provide the answer (or one of them) to the housing crisis.

The National Association of Realtors’ Investment and Vacation Home Buyers Survey reports that investment-home sales soared a whopping 64.5% in 2011, with investors purchasing 1.23 million homes compared to 749,000 in 2010.

“In the next five to 10 years, you’ll see tens of billions, if not hundreds of billions, of dollars of private equity” pouring into the single-family rental business,” says Justin Chang, principal of investment firm Colony Capital. In the past six months, Colony has bought more than 1,000 homes to turn into rentals. Most are in Arizona, California and Nevada, though Colony expects to expand into Texas, Georgia and Florida. In the next year, it will invest at least $1.5 billion in single-family rentals, Chang says.  According to Forbes, “the concept is catching fire on Wall Street and with good reason: While a 10-year Treasury note yields little more than 2%, economists at Goldman Sachs calculate that rental property investments yield more than 6% on average, nationwide.”

Blogging on the real estate website,, Ernst & Young’s Howard Roth stresses the importance of geography: “The places attracting the most attention from rent-to-buy investors are all cities that, although hard hit, have good long-term fundamentals and strong rental demand, such as: Las Vegas, Miami, Phoenix and, in California, the Inland Empire and Sacramento. Homes in Phoenix, for example, have appreciated 15% to 20% since the start of the recovery, a trend that is expected to carry on if investors there continue to absorb supply from the market. Already, there is less than a two-month supply of homes to be sold in Phoenix, compared to a one-year backlog a year ago.”

The most coveted investment play today for the high-cap private equity player is to bulk buy REO (bank-owned) homes. As Forbes explains it, “the largest holders of distressed assets are the Government-Sponsored Enterprises Fannie Mae and Freddie Mac. Together the two mortgage giants own roughly 180,000 foreclosed homes.” In February, the Federal Housing Finance Agency announced the launching of a pilot program that puts 2,500 of Fannie Mae’s homes in eight locations, valued at $320 million, up for sale. On July 3, the FHFA announced that the winning bidders in the REO to Rental initiative had been chosen and transactions were expected to close early in the third quarter.

Investors were were evaluated on the basis of several factors, including financial strength, asset management experience, property management expertise and experience in the geographic area..

Even with big investors entering the space however, the housing problem remains outsized: Nearly 650,000 REO properties sit on the books of the nation’s banks and 710,000 more are pushing through the foreclosure process, according to RealtyTrac. Still, the entry of institutional and private investors into the housing space does raise several promising notions: a higher professionalism in the management and operation of the assets; a portfolio strategy that can raise the value of more challenged assets; and ultimately a way for renters to re-enter the home ownership by saving and re-building their equity while they rent. Could it be that Keynes and Hayek are both right?

Fannie Mae Asks Uncle Sam For More Money

Wednesday, March 21st, 2012

In an attempt to dig itself out of a deepening hole, Fannie Mae has requested $4.6 billion in additional federal aid. “We think that we have reserved for and recognized substantially all of the credit losses associated with the legacy book,” Chief Financial Officer Susan McFarland said.  “We’re very focused on returning to profitability so we don’t have to draw (from Treasury) to cover operating losses.”

Although the nation’s banks seem to be recovering nicely, the same cannot be said for mortgage giants Fannie Mae and Freddie Mac.  Writing in Forbes, Steve Schaefer notes that “The mortgage finance giants have taken on a greater share of supporting the U.S. housing market as private players pared back their exposure in recent years, and the result has been billions of losses on the taxpayer dime.  Fannie Mae reported booking a $16.9 billion 2011 loss capped off by the loss of $2.4 billion in the 4th quarter.  Fannie Mae’s losses are still coming largely from its legacy book of business (from before 2009), which led to $5.5 billion in credit-related expenses tied to declining home prices.

“The black holes of Fannie and Freddie – Fannie’s Q4 report shows it has requested to draw $116.2 billion since being placed under conservatorship Sept. 6, 2008 while paying back $19.9 billion in preferred stock dividends – are the biggest black eyes of the 2008 bailouts.  Plenty of critics of the Troubled Asset Relief Program (TARP) have made their voices heard over the years, but at least most of the banks that received TARP injections – the biggest of which went to Bank of America and Citigroup – have paid back the government’s loans and are back to making profits, if modest ones. Even American Intl Group and the automakers  that received bailouts – General Motors and Chrysler – have moved beyond needing additional government dollars.  Fannie and Freddie, on the other hand, show few signs of becoming anything resembling productive companies until the housing market turns around or the pre-2009 assets are completely wiped off the books or new policies are necessary to encourage new refinancing beyond those currently in place that have had limited impact.”

“While economic factors such as falling home prices and high unemployment produced strong headwinds for our business again in 2011, we continued to grow a very strong new book of business as we have since 2009, “said CEO Michael Williams, who handed in his resignation in January but is still on board while the government-sponsored enterprise (GSE) looks for his replacement.

Bank of America last week announced that it had stopped selling some mortgages to Fannie Mae because of a dispute over requests from the government-run company to buy back defective loans.  “If Fannie Mae collects less than the amount it expects from Bank of America, Fannie Mae may be required to seek additional funds from Treasury,” the company said.

Fannie Mae blamed its loss primarily on pre-2009 loans and falling home prices, which pushed up the company’s credit-related expenses.  In the 4th quarter of 2010, Fannie Mae posted a slight profit to end a streak of 13 consecutive quarterly losses, though the company was back in the red in the following quarter and each since.  The net cost to taxpayers for bailing out Fannie and Freddie stands at more than $152 billion.

During the 4th quarter, Fannie Mae acquired 47,256 single family homes through foreclosure compared with 45,194 in the 3rd quarter.  The company disposed of 51,344 REO properties in the quarter, down from 58,297 in the 3rd quarter.  As of the end of 2011, Fannie Mae was holding 118,528 REO properties, a reduction from the 122,616 at the end of September and 162,489 on December 31, 2010.  The value of the single-family REO was $9.7 billion compared with $11.0 billion at the end of the 3rd quarter and $15.0 billion at the end of 2010.  The single family foreclosure rate in the 3rd quarter was 1.13 percent annualized compared with 1.15 for the first three quarters of the year and 1.46 percent for 2010.

Meanwhile, the federal government wants to sell approximately 2,500 distressed properties in eight locations to investors who buy them in bulk and rent them out for a predetermined period.  The properties, located in Atlanta, Phoenix, Las Vegas, Los Angeles/Riverside, and three Florida regions, include single-family homes and co-op apartment buildings.  “This is another important milestone in our initiative designed to reduce taxpayer losses, stabilize neighborhoods and home values, shift to more private management of properties, and reduce the supply of REO properties in the marketplace,” said Edward J. DeMarco, the acting director of the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae.