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Government to unload foreclosures

By Judy Martel · Bankrate.com
Monday, January 9, 2012
Posted: 5 pm ET

A bulging pipeline is prompting the Obama administration to implement its plan to sell foreclosed properties in bulk to investors who will rent them out, potentially solving the problem of hundreds of thousands of vacant homes dragging down home values. According to CNBNC, the administration is close to announcing the pilot program, which is being conducted with government-owned mortgage companies Fannie Mae and Freddie Mac.

With approximately 250,000 foreclosed properties held by Fannie Mae, Freddie Mac and the Federal Housing Administration, delays in processing have developed into a backlog that is preventing the agencies from getting the homes back on the market. Worse, there are even more potential foreclosures lurking. Lender Processing Services reports close to 2 million properties that are seriously delinquent.

Details about the government's plan to encourage private investors to buy the properties are still being worked out. They include pricing, how the public-private partnership will operate and what expertise is needed to manage large-scale property ownership. Previous attempts at enticing private investors such as hedge funds to buy homes in bulk have not appeared to be lucrative to the private sector, which is the major roadblock in moving forward with a plan. Private enterprise will invest when the numbers add up to a good deal, meaning they can justify the cost of managing hundreds of homes scattered in various locations, which is quite different than managing one building with multiple dwellings.

The goal of the program is to control supply and demand. By converting foreclosed properties into rentals, the supply of for-sale homes will diminish and that, officials hope, will stimulate the housing market.

What do you think of the government's plan to sell foreclosed properties to private investors?

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90 Comments
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January 12, 2012 at 4:19 pm

Another example why economic and political discussions shouldn't mix.

The world did exist before 2007... before the 1996-2001 US equity bubble and crash... before the Nikkei's rise and pop... before Greenspan's Fed... and even before Reagan's Tax Ax...

You see, the housing bubble was a supercycle that grew roots out of the Depression. It was a perfect storm of arrogance, hubris, and safety... it was mixed with generations demographics, fiscal policies, trade policies and monetary policies.

There's a natural social progression that happens over long periods of time. This is why bubbles do not repeat themselves. Confidence becomes arrogance... and arrogance turns to hubris. The hubris is so difficult to see because it is cloaked under the description of "common wisdom".

When these bubbles pop, the participants are scarred with distrust that never will return. It is no coincidence that these types of bubbles repeat themselves just outside of living history. It is impossible to recreate generations of common wisdom without a new set of generations to build that common wisdom.

The error of many economists and pundits and especially politicians is to concern themselves with the fallout of a crashed bubble. You see, by doing this, they can exonerate themselves of any role that they explicitly had in promoting the bubble. They ignore the cumulative and compounded effects of policy decisions made over decades because they can't tie it to a negative consequence at an earlier date.

This is akin to a smoker who smokes heavily for 10 years that has no noticeable side effects, however 30 years down the road develops a cough and 10 years later can't figure out why they have a hard time getting their breath.

The real discussion should not be centered on why it falls apart, but rather how it was put together. The implosion is the cure for malinvestment, not the problem. It's unfortunate that everyone wants to pick 1 thing or 1 person to use as a scapegoat. The truth is that most all of us had a hand in building this housing bubble, even if we never owned a house.

Sheila
January 12, 2012 at 12:43 am

Regarding jooecaff2's comment....
It was not the Obama Administration that was in command during the declining market of 2001 or the declining market of 2007 in real estate. It was the Bush Administration that was in command at that time and that chose to send our troops to fight a war over oil. Now do some research and check to see who owns VALERO gas stations. Funny... huh!

Obama is now taking the blame because the repercussions are occurring during his office. But they were set forward well before his time.
He is attempting to clean up the mess made prior to his PRESIDENCY, but how sly the previous President was.
Thanks.

Sheila
January 12, 2012 at 12:03 am

And "yes", Michelle sell the already foreclosed properties back to the originally foreclosed upon owner for the current market values set. As I said in the blog before this one, the credit is hit so hard now, another lender is not going to look at them and give them a loan. But if the government forces the same lender to sell it back to them at the lower (current) market value and requires them to overlook the previous foreclosure, provided they will be able to afford the new payment... this would be the ideal answer for the REO's on the banks books now. :) And it will put the family back in to their home.

Sheila
January 11, 2012 at 11:51 pm

PRINCIPAL BALANCE REDUCTION PLAN is the answer!

As I said before, the banks really need to be forced to eat and swallow some of this debt. And Tom, yes this should apply to any upside down property purchased before Jan.1, 2011 even those that are not in default. Otherwise, those will be the next in the foreclosure cycle as I explained in my previous blog. That is part of the past problem too... the banks don't want to talk to you about a modification until you are in default (missed at least two payments). So you have to take a hit on your credit to be helped. This could later result in a denial of a refinance loan if you did not qualify for the mod, even if you managed to pay up your defaulted payments and managed to have your default rescinded, and then paid the loan down to a reasonable balance to qualify for refinancing. I believe those who purchased on or after Jan. 1, 2011 bought in to a more stable market with a more reasonable value set, and we should get the ball rolling forward again from that point. There has to be a point where the assistance stops and that should be it. I think private investors should be assisted too, if the properties are upside and there is a bank loan recorded prior to 01/01/11. We have to come to the mountain before we can climb it. Bringing all the upside down mortgages forward (the mountain) and having the government force the banks to assist is the only way to stop the cycle... so we can climb that mountain once. Instead we are hitting small cycles of foreclosures (hills) that will keep causing the market values to stay low. Example: Take a property that is not a foreclosure or a short sale property, the owner would like to sell at market value, well if all his neighbors and surrounding properties have been foreclosed on versus being sold on a "regular" sale, his property is going to be sold for nearly the same price of the foreclosed properties, due to appraisal comps. Considering the banks probably sold at a reduced price just to get the foreclosed properties off their books and not have to pay for upkeep, this is reducing the value of his home and the market value. So this owner is going to have to either keep the home or sell it at the lower price.

The banks are "trying" to assist by reducing the payments down to an affordable payment for a short time. Well don't forget this is just reducing the payments to an affordable amount for a specific duration, the problem is still there lurking... an upside down mortgage. So unless properties values have sprung back to the 2002-2006 market values you will still be upside down if you purchased and took out a loan during this time frame. And let us not forget about the negative amortization loans from that time also, where you could have gone backwards and owe more than you purchased your property for. Yes, as the saying goes... if it sounds too good to be true it probably is. But we can't cry over spilled milk. We do have to find a way to clean it off the floor and move on. So...What do we have to do to get help for the people sooner than later? Lets not wait until they are sick with worry, give up and stop paying everything altogether... C'mon American people speak up! Call your local government, your State or County Government... they have a stake in this too. If enough of us are saying the same thing...maybe they will realize this is the only way to go... reduce the principal balance of mortgage loans to market value. Unloading or selling foreclosed properties to rich investors is not the answer. Especially... knowing there are more foreclosures to come... and they will come. It is inevitable without a Principal Balance Reduction Plan.

Okay, I will stop now... but someone has to listen at some point or we are going to stay in this predicament. Thanks.

sonny
January 11, 2012 at 10:57 pm

Does Obama or most of those in Fannie, Freddie know of all the problems and grief of a landlord with tenants. The ever increasing cost including Real estate taxes, Trash removal and upkeep to code of rental units. To those that tackle this. GOOD lUCK

Bob
January 11, 2012 at 10:08 pm

This is a great idea! How else can Freddie and Fannie raise the necessary money to dish out bonuses to there top earning executives. Obama will push this through with no restrictions attached to the investors. Just like he bailed out the banks with no restrictions or oversight. The investors will buy these properties at bargain basement prices and imediately put them back on the market to make a quick profit. The housing market will still have an oversupply which will continue to drag the prices down. They will then manipulate the housing statistics and report that housing prices have risen.

jooecaff2
January 11, 2012 at 6:41 pm

Perhaps I am reading too much into this new plan to clear the housing market of foreclosures but I don’t think so considering the current administrations beliefs and long-term goals.

This plan sounds like the perfect foundation to begin the plan that HUD has had on the drawing board for over twenty years... SCATTERED SIGHT LOW-INCOME HOUSEING! What better way to implement the Progressive dream of making everything “FAIR” for those who were “ripped-off” by those evil bankers. It fits perfectly with Obama and the Progressives, especially considering that HUD has been in the process of tearing down the low-income housing that they built forty years ago. These high-rises represented a miserable failure, if you describe failure as decrepit, poorly maintained government run properties riddled with crime, drugs and unfortunate families that can’t escape from the largess of good hearted Liberals. Now, Obama can use Freddy and Fannie (government run, oh, I mean privately run) to scoop-up as many foreclosure’s as possible and then install these same families into the Scattered Sight Housing! How perfect.

Finally, this move will make everything “FAIR” for everyone, folks who cannot afford to buy a house in your neighborhood will get a GOVERNMENT PROVIDED, RENT CONTOLLED HOME and all will be perfect in Obamaville. What a great man Obama is, he is only interested in doing what is “FAIR” even if it means that your real estate value decreases as a result of having many “RENTAL HOMES” on your street full of folks handpicked by HUD and the Obama Administration. Don’t worry though, after about forty years and a few TRILLION DOLLARS the Progressives will once again concluded that this government giveaway didn’t work any better than the last housing projects. Who cares, it’s not like they are spending their own money… just the TAXPAYERS! WAKE UP AMERICA!

Tom
January 11, 2012 at 5:00 pm

Michelle has a good idea, "... why not just sell them to the current owners at the same price ... or allow the current owners to sell them at the reduced price and write off the difference ...."
Fannie Mae and Freddie Mac are going to lose money either way; whether they sell the properties to savvy investors who'll know how to strike a good bargain with the GSEs, or let the existing home owners either repurchase or sell the homes themselves. Her first option to allow the home owners to buy their homes at a reduced price gives them more time to see their homes eventually appreciate; it's less disruptive to their lives, since they won't have to move unless they want to; and it keeps Fannie and Freddie out of the home rental business, where they have no experience. Also, there's no guarantee that the investors will eventually sell the homes at higher prices than the existing home owners. The investors may get panicky after a time if the market is sluggish and unload a bunch of homes on the market at low prices.

SUE Sawyer
January 11, 2012 at 4:48 pm

Again, the rich will get richer....the home owner still gets the shaft.Banks refuse to hire more employees to handle real estate files to make processing go faster. For housing prices to start reflecting it's real market value, get rid of ZILLOW as a defacto price value for real estate and only rely on the opinions of human appraisals. Computers can't see "real" or even know what a "true value" is or the impending result of the art of the deal to get to the price which may not have any meaning to a like property. Computers will not let a "like property" stand as an individual price.

Bring back Glass Sewall !!!!!

Michelle
January 11, 2012 at 3:54 pm

Rather thsan sell them to rich investors for pennies on the dollar who will then rent them or more likely resell them at a higher prices and make more money, why not just sell them to the current owners at that same price (modification and write off the difference) or allow the current owners to sell them at the reduced price and write off the difference rather than forcing foreclosures and bankrupties on the people and writing the balance off anyway. The banks are all whining that the modifications are "too hard" but foreclosures and resales are easier? Gimme a break.....