Two years ago, I penned the column "A Huge Housing Bargain -- but Not for You." It was republished by TheStreet at the main site, went viral, sparked multiple other articles at other media outlets on the subject of the treatment of foreclosures and was instrumental in the introduction of a U.S. House of Representatives bill, the Saving Taxpayers from Unnecessary GSE Bulk Sale Programs Act of 2012.
Since then, I've written multiple columns on the subject of the treatment of foreclosures and nonperforming mortgages by U.S. banks, as I believe it is an important macro issue that has implications for all asset classes and for the economy in general.
I am going to address this situation from a different vantage point and then discuss the potential implications.
After the housing market crashed, Lehman Brothers collapsed and housing values declined dramatically, the private-equity and hedge-fund communities created funds for buying the foreclosed properties from the government-sponsored enterprises and from banks.
The plan was to buy up the Federal Housing Administration foreclosures from the U.S. Department of Housing and Urban Development first, in order to prove the business and economic viability of privatizing public assets in bulk, with the goal of quickly returning them to the market as rental properties.
Once that process had begun and the funds were self-sustaining on cash flow from the rental income, or when they were anticipated to be, they would buy the Fannie Mae, Freddie Mac and non-GSE bank-owned real estate in a similar bulk fashion.
The hitch in the beginning was that the funds' bids for the purchase of HUD properties were very low. That caused the time-line to get the funds operating to be pushed out, and the delay gave opponents the opportunity to build the political will to push back against the bulk sale process.
The banks never really considered the bulk sales, because the losses would have been too great, so they decided to keep kicking the issue into the future by refusing to sell foreclosures or even address the nonperforming mortgages, as I've discussed.
Then, on Feb. 10, 2012 Ben Bernanke gave a speech to the National Association of Home Builders in which he publicly urged the banks to rent their foreclosed properties directly to individuals rather than selling them one at a time or in bulk.
About a year and a half later, the banks appear to be doing just that.
Last week, Josh Salman from the Sarasota, Fla., Herald-Tribune provided excellent insight into this issue in the article "Big lenders bidding to keep homes," in which he notes that banks are buying back their own foreclosures at auction at a premium to other bidders and market value.
This process is still in the early stages, but it represents huge legal, regulatory and legislative issues if the banks not only retain ownership of their foreclosed properties but begin to bid for other properties, which would be the logical business strategy once the structure for owning and operating rental properties has been established.
The next issue to watch for is whether the banks actually rent the properties or attempt to manipulate rental rates by holding properties off the market.
It is important to note here that what Bernanke had proposed in his speech, that banks own and rent properties directly, was intended as a temporary solution, with a goal of smoothing the rate at which the banks had to sell properties. It was not supposed to be a permanent part of bank operations.
Banks are not legally supposed to be in the business of doing anything other than lending money, except in extraordinary circumstances.
More important in the immediate term is that the majority of foreclosed residential properties is already overwhelmingly concentrated in the four money centers: JPMorgan (JPM), Bank of America (BAC), Wells Fargo (WFC) and Citigroup (C).
If these four -- or worse, if just one or two of them -- begin to absorb the millions of properties that are in foreclosure or default now and then convert them to rentals rather than selling them, the wealth concentration would be even worse than I originally wrote about.
This is an issue I will be following and commenting on regularly. For now, though, there is no trading or investing insight I can offer from this, other than that it is good to be aware of.