This past August I wrote a column entitled A Huge Housing Bargain -- but Not for You. In it, I outlined the Request for Information made by the Federal Housing Finance Agency in reference to comments from investors and other interested parties about the possibility of bulk selling the homes acquired by Fannie Mae and Freddie Mac through the foreclosure process.
The comment period ended in September with more than 4,000 responses from investors. The FHFA has indicated that it will move forward with the process of bulk selling these homes to investors. The rules for participating will be made available as early as this month. The Department of Housing and Urban Development (HUD) will also participate with its holdings of homes, which were acquired through foreclosures of properties financed with loans through the Federal Housing Administration (FHA).
Based on my personal experience, here is some of what we may expect from the process as it moves forward:
When real estate started to contract in 2007, the majority of the foreclosures were on entry-level homes, many of which had been financed through the FHA, especially in the middle part of the country. As a result these homes ended up being owned by HUD with concentrations in Ohio, Michigan, Georgia and rising elsewhere.
HUD tasked the Marketing and Management firm for the properties in Ohio with creating a system for bulk selling those properties that could then be copied for the rest of the country. That M&M firm contacted me and I set out to create such a program. I raised $500 million dollars in commits from investors with the intention of buying the properties HUD owned in Ohio and three other states.
The parameters of the program we designed provide the template by which I will be measuring the process HUD and FHFA have decided upon when reporting on this to you in the future.
In early 2008, the real estate crisis was still unfolding. Countrywide had received its first $2B bail out from Bank of America (BAC) the previous September but Bear Stearns and Lehman Brothers had not yet failed. So the fund we put together was closer to an angel fund than a vulture fund. Our job was to attempt to put a floor underneath the value of the properties and to get them occupied again as soon as possible.
We agreed to buy the properties from HUD based on what is called a Broker Price Opinion or a Derived Investment Value. Many of the properties were in need of repair and our plan was to form alliances with municipalities, community colleges, and builders to create vocational training programs in carpentry, plumbing, electrical, and others. Once repaired, the goal was to get the properties back into the hands of new homeowners as quickly as possible, not to rent them.
We intended to use a lease to purchase options for new home buyers that would allow them to earn their way into ownership by applying a portion of their rent payment to equity over a period of two to five years. This would provide the new buyers with time in which to re-establish personal credit in order to be able to refinance the property into their own name later, with the equity in the property accruing to them during the interim, instead of to our firm.
There were many other features of the program but those are the highlights. The program was never finalized and no transfers took place due to the events following the collapse of Lehman Brothers pre-empted everything.
Bulk sales of properties served a purpose when there were few buyers willing to step in. That is not the case today; therefore, I am cautious about what to expect from HUD and the FHFA with respect to the opportunities for both individual home buyers and investors to be allowed to participate in this program.
As I had mentioned in the column referenced above, there is almost assuredly no way that passive individual investors will be allowed to participate in the initial transfer of properties to the acquiring group.
It is possible that once the initial transfer is completed that the properties will be resold into or otherwise transferred into what is called a Real Estate Operating Company (REOC) or some other publicly traded vehicle. If these vehicles become available, I will comment more on those opportunities in the future.