Fannie Mae plans to sell nearly 2,500 foreclosed real estate properties to institutional investors who promise to rent them out for several years rather than resell them. The goal is to rapidly reduce the backlog of houses for sale without crashing real estate prices.
This pilot project is scheduled to launch in May. It would offer for sale blocs of foreclosed houses in Chicago, Phoenix, Atlanta, Las Vegas, Southern California, and several areas of Florida.
The program of bulk sales may stabilize real-estate prices but it probably can’t raise them by much, said Chris Whalen, managing director of Institutional Risk Analytics. He said there are many potential private sellers who have been waiting three to four years for the market to improve.
Think of “a grandma and granddad who would like to sell their house and move to Florida,” he said. If prices rise, “they’re going to call their realtor and say, ‘Sell the house.’ So you have this constant downward pressure on prices.”
‘Could be Positive’
The bulk-sale program “could be really positive in that it both removes some of the distressed properties from the market for sale and also adds properties to the rental market,” said Mike Fratantoni, vice president of research for the Mortgage Bankers Association. Rental rates are climbing rapidly, he said, because many people who lose their homes or start new families cannot afford to buy.
Recent drafts of the Fannie Mae deals say investors would be unable to resell the properties for three to five years. But a senior manager of one bidding firm said even if the final terms are for 10 years, the offer would still be worthwhile.
He expects annual yields of 8 to 10 percent on these rental investments. That’s higher than the Goldman Sachs prediction of an average of 6 percent, with 8 percent for certain markets.
Whalen takes issue with these rosy projections: “If you really factor in maintenance, capital expenditures, and depreciation, you’re looking at more like 4 percent.”
‘Continuing to Move Wealth’
There’s a chance Wall Street firms could suffer bad publicity for buying up foreclosed homes. Professor Randall Wray of the Levy Economics Institute characterized the bulk sales as “continuing the process of moving all the wealth to the top 1 percent.”
Marc Weiss, a past Fannie Mae consultant and current chairman and CEO of the Global Urban Development think tank, also expressed doubts. He drew comparisons to the Resolution Trust Corporation, which took over many mortgage loans during the savings and loan crisis of the 1980s and early 1990s.
In the RTC case, said Weiss, “The government made money by holding the housing long enough to sell it off at advanced prices.”
But Whalen credits Fannie Mae for trying to find innovative ways to efficiently offload some of its 120,000 foreclosed properties. The planned sale of 2,500 homes is just a pilot project to see if big investors might take a lot more distressed real estate off the government’s hands.
Could ‘Disrupt Fragile Market’
Joseph Pigg is vice president and senior counsel for the American Bankers Association. He said he’s “cautiously supportive” of the program but warned Fannie Mae must be careful not to “disrupt an already fragile market.” The ABA recommended in a September 2011 letter that the Federal Housing Finance Agency “consider limiting factors such as a cap on the number of potential new sale or rental properties.”
Rapid addition of rental units could drive rents so low that it becomes more attractive than purchasing. This, the ABA wrote, could be “devastating to house prices.”
The Mortgage Bankers Association’s Fratantoni said bulk sales may work in some of the hardest-hit markets, like Florida and Arizona, but “it’s not a silver bullet.” In most areas of the country, he’d rather see other tools used, such as allowing smaller investors to qualify for home-rehabilitation financing through the Federal Housing Authority.
Fratantoni believes the country is entering a new normal in which more people rent and fewer own their homes. A bulk-sale program may ease the transition.
Mike Reid ([email protected]) is the manager of Invisible Order, a libertarian editorial-solutions company.