By Mike Whitney
September 5, 2012
Private Equity firms are piling in to the housing market to take advantage of bargain basement prices on distressed inventory. The Obama administration is stealthily selling homes to big investors who are required to sign non-disclosure agreements to ensure that the public remains in the dark as to the magnitude of the giveaway. Aside from the steep discounts on the homes themselves, the government is also providing “synthetic financing to reduce the up-front capital required if they agree to form a joint venture with Fannie Mae and share proceeds from the rental or sale of properties.” (Businessweek)
In other words, US-taxpayers are providing extravagant financing for deep-pocket speculators who want to reduce their risk while maximizing their profits via additional leverage. The plan resembles Treasury Secretary Timothy Geithner’s Public-Private Partnership Investment Program, (PPIP) which Columbia University professor Joseph Stiglitz denounced in an op-ed in the New York Times. Here’s what he said:
“The Obama administration’s $500 billion or more proposal to deal with America’s ailing banks has been described by some in the financial markets as a win-win-win proposal. Actually, it is a win-win-lose proposal: the banks win, investors win — and taxpayers lose.”
The same rule applies here. Speculators are getting lavish incentives (gov financing, low rates, and severe discounts) in secret deals to buy distressed inventory which should be available to the public at market prices. If that’s not a ripoff, then what is?
Now take a look at this clip from an article in Nuwire Investor:
“Single-family homes are on the radar with private equity investors for good reason. There is a robust pipeline of distressed properties that is allowing owners to buy property at a steep discount—typically 30 percent to 50 percent of replacement cost.
The volume of foreclosure filings in the U.S. totaled more than 2.8 million per year in both 2009 and 2010. Although the volume of home foreclosures dropped to 1.9 million in 2011, there were approximately 1.5 million active home foreclosure filings recorded during the first six months of 2012, according to data from RealtyTrac, an Irvine, Calif.-based listing service. The current volume is about five times higher than the rate of foreclosures that were occurring prior to the housing bust. In 2005, for example, home foreclosure filings reached just 532,833, according to RealtyTrac.
That inventory includes an ample supply of quality middle-class homes in good neighborhoods. Investors are finding that they can buy three-bedroom, two-bath homes, many of which were built in 2005 or later. At the peak of the market, these homes were selling for about $250,000, and now investors are able to buy them at prices averaging between $100,000 and $130,000.” (“Private Equity Funds Prey On Distressed Housing”, NuWire Investor)
Read that again. Obama’s preferred customers are getting discounts of up-to 60 percent of the home’s peak value and generous gov-backed financing to boot! Where can Mom and Pop get a deal like that?
As we have noted in previous articles, housing prices are going up for two reasons. First, because the banks are withholding their distressed inventory (delaying foreclosures) to keep prices artificially high. And, second, because of Private Equity firms are buying up the available stock of distressed homes in special “bulk sales” deals that are pushing up prices on lower-end homes. Housing analyst Michael Olenick sheds a bit of light on these secret transactions in a recent post on Naked Capitalism. Here’s a clip:
“Besides lower foreclosure activity, the government is going all out to give away houses to private equity firms. Recently Fannie Mae sold 275 properties across metro Phoenix in one sale to a mystery buyer, according to a report by Catherine Reagor of the Arizon Republic. All Fannie disclosed is the buyer is an LLC, which Fannie apparently helped create, based at 135 N. Los Robles Ave., in Pasadena, CA. Google shows that is the US address of EastWest Bank, a bank whose tagline is “Your Financial Bridge,” presumably between Asian money and Phoenix real estate. Fannie’s decision to sell Phoenix to Asian investors keeps 275 houses off the local market, which drives up prices for Phoenix homes people intend to actually live in, rather than flip. (Update: Nick Timiraos points out by e-mail that Fannie’s address in Pasadena is the same as EastWest’s, and Bloomberg has reported that Colony is the buyer. But this still raises the question of why Fannie cooperate with what appears to be an effort to hide the identity of the buyer.) (“Still Looking for a Housing Bottom”, Michael Olenick, naked capitalism)
So, why all the cloak and dagger? Why is the public being kept in the dark? And, most importantly, why are taxpayers providing financing for moneybags PE firms on discounted homes that would sell on Day 1 if they offered to the general public? This whole operation stinks to high-heaven.
As the article above indicates, there’s no shortage of delinquent homes that will eventually be foreclosed. That means the process is being dragged out so the banks don’t have to fess-up to the losses on their fetid pile of nonperforming loans Here’s a little more background from an article in Businessweek:
“About 6 million U.S. borrowers will lose their homes in the next five years because of inability to pay their mortgages, creating demand for as many as 4 million new rental households, according to Scott Simon, head of mortgage bonds at Pacific Investment Management Co. in Newport Beach, California….
Single-family rentals are priced to deliver unlevered total returns in the range of 7.5 percent to 8 percent, or about 0.5 percentage point to 1 percentage point higher than institutional-quality apartments, according to a June 8 report by Ray Huang, senior associate at Green Street Advisors in Newport Beach, California. (“Colony Said to Win Foreclosed Homes Sold by Fannie Mae”, Businessweek)
If “6 million homeowners” will lose their homes in the next five years, then why are clownshoes media dupes touting a “bottom” in prices and a “market rebound”?
It’s all hype. And look at how calculatingly fiendish Obama’s foreclosure-to-rental program really is. The big boys have figured out the nearest penny how much they can make by throwing people out of their homes. (7.5 percent to 8 percent) Talk about heartless. And, of course, this whole process is being orchestrated by President Fairydust and his Wall Street Pranksters to keep prices artificially high and preserve the illusion that the banks are solvent.
Read all posts by Mike Whitney