By Mike Colpitts
The U.S. government is starting to sell-off its massive over-supply of foreclosed homes to investment equity firms at major discounts in a controversial trial program that could result in the future sale of hundreds of thousands of similar homes for pennies on the dollar.
The Federal Housing Finance Agency (FHFA) announced the start of the sales under a pilot program in the hardest hit metropolitan areas, including Los Angeles, Las Vegas, Atlanta, Chicago, Phoenix and a handful of areas in Florida. The sales will start with 2,490 properties, the majority of which are single family homes (1,743) in the eight cities first targeted for the program.
The other properties are composed of condominiums, townhouse and apartment units. The bulk of properties are expected to be bought by private equity investment firms, many of whom are associated with individuals who are responsible for triggering the financial crisis.
Fannie Mae will offer pools of properties, including rental homes, vacant properties and non-performing loans with homeowners who are still living in foreclosed properties.
According to federal officials, the intent of the program is to clear the surplus of distressed housing from the marketplace. Fannie Mae holds more than 122,000 REOs in its current inventory, and Freddie Mac, which could be added to the program if the initial phase is successful has about 60,000 residential properties in its present government owned inventory of foreclosed properties.
Investment bank Morgan Stanley analysts estimate that the program will create as many as 1.8 million construction jobs in the construction and real estate industries when the program is fully operational.
Prequalified investors are required to submit applications to demonstrate their financial capability to make the purchases in cash, experience to managing the properties and rent the homes for an as of yet unspecified number of years.
“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 acting FHFA Director Edward DeMarco in a statement released to the media.
“We believe that this initiative holds promise for providing support to local neighborhoods that were especially hard hit by the housing crisis and will help meet the rising demand for rental housing in many communities,” said Michael Stegman, Counselor to the Secretary of the Treasury for Housing Finance Policy.
Investors who post a deposit and sign a confidentiality agreement to make the controversial purchases will gain access to detailed information about the properties. Interested investors must submit an application, which will be reviewed by an outside firm to determine their ability to purchase and manage the properties. Only investors who meet restrictive government eligibility requirements will be eligible to bid.