Tuesday, March 20, 2012

Fannie, Freddie Spark Greatest Home Sales Rush of the Decade

Fannie Mae, the nation's largest holder of residential mortgages, is taking a calculated risk in offering bulk sales of 2,490 owner-occupied foreclosed-on properties to the highest bidders.  The houses are packaged in eight regional pools. Credit Suisse is managing the sale for Fannie Mae.

The current market value of the properties is $320 million. In dollar terms, that is not a large number for Wall Street. But investors anticipate a future high return on the properties, higher than they currently are receiving on various bond offerings.

The offered units are only 2 percent of the 120,000 foreclosed properties that Fannie Mae had on its books on Jan. 1, 2012.

Freddie Mac has another 60,000 foreclosed properties in its portfolio. Together, the current market value of the 180,000 properties would be about $15 billion, both agencies have previously confirmed.

Until now, Freddie and Fannie Mae have stayed away from bulk sales because, they say, they can get better prices selling the homes one at a time.  Freddie Mac is not involved in the Fannie Mae bulk sale.

Florida, Arizona and Southern California house many of the properties.

The bid deadline is April 16. The deals have to close by May 21.

It could be the biggest home-sale surge of the decade.  It could also turn out to be another Wall Street debacle.

Wall Street likes the idea because the rented residences have the potential of offering better returns than are currently offered by mortgage bonds and investment-grade corporate bonds.

The rented Fannie Mae homes could deliver a return of 6 percent to 8 percent, according to some street insiders. Contrast that with mortgage bonds yielding about 3 percent and investment-grade corporate bonds returning 3.5 percent.  The numbers are from Barclays Capital U.S. Investment-Grade Index.

Barclays research also shows about 800,000 former owner-occupied homes are being converted to rentals each year. A total of 4.3 million previously owned homes changed hands last year.

Also tempting Wall Street investors at this time is the knowledge that rents are rising in many of the troubled residential markets while sales continue to stagnate.

Fannie Mae likes the idea because the pool sale could quickly decrease the number of homes-for-sale on the market, a boost for the nation's struggling economy.  Fannie Mae also thinks the bulk sale concept will work because the investors would have to promise not to re-sell the properties for several years.

What Fannie Mae doesn't like about the sale is that the bids may come in at a ridiculously low number and take away any profit or break-even advantage it might otherwise have enjoyed with single-family sales.

Buyers have demanded steep discounts from Fannie Mae on some of the properties it previously offered. If that happens again this time, Fannie Mae is expected to bow out of any planned future bulk sale offerings.

Last year, Fannie sold more than 240,000 homes to buyers looking for a home to live in or to small investors who would either rent or resell them.

According to its own figures, Fannie Mae last year lost about 35 cents on every $1 of debt that went through foreclosure. Contrast that with many banks getting more than 90 cents on the dollar selling through regular real-estate listings, according to industry analysts.

Big-name Wall Street players already are lining up for the sale.  They include Omaha's legendary financier Warren Buffett; Lewis Ranieri, another Wall Street legend and mortgage bond-packaging pioneer; New York City's Amherst Securities Group, Paulson & Co. and Colony Capital LLC; Rialto Capital Management LLC of Miami; and American Residential Properties of Scottsdale, AZ.

In a widely-publicized TV interview last month on CNBC, Buffett said he is ready to buy up "a couple hundred thousand" already-rented and owner-occupied single family homes if the buying process was not too difficult or had many strings attached to the deal.
Posted by Alex Finkelstein 03/20/12 8:03 AM ESTAuthor Bio

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