Wednesday, August 17, 2011

The Heist

Last week, the Obama Administration announced its newest plan to deal with the sagging housing market.  The White House wants to convert the foreclosed homes owed by Fannie Mae, Freddie Mac and HUD into rental properties.  Proponents of the idea say that clearing these properties out of inventory will actually help the housing market since the discounted prices of foreclosures are forcing down the prices of resales and of housing in general. 

Regular readers of this blog know that I have been saying from the beginning that the Administration's plan is to convert our country from a nation of homeowners to a nation of renters, but this new announcement from the White House is such an open and blatant expression of this policy that even I was surprised. Because of robo-signing scandals, many foreclosure proceedings have been put on hold, but as soon as the attorneys-general in many states have an opportunity to review the paperwork and clear the properties for foreclosure, many more properties will join their ranks.  At the end of June, Fannie Mae, Freddie Mac, and FHA owned about 250,000 foreclosed homes, but, according to Barclays, about 830,000 additional homes are in some stage of foreclosure.  So within a few months, just over 1,000,000 homes owned by the federal government will be in foreclosure.

And there will be plenty of tenants.  According to the Huffington Post, since 2008 approximately 3,000,000 Americans have become renters, with another 3,000,000 expected to join their ranks by 2015.

The federal government is actually fielding two proposals right now.  The first is to sell hundreds or thousands of foreclosed homes in bundles to private investors who will agree to rent them out.  Reportedly this is the proposal that HUD prefers. 

The second proposal is for a public private partnership between Fannie Mae and Freddie Mac and a group of private investors who will create a joint venture with a pool of rental homes.  A national property management company will be retained to handle the nuts and bolts of renting the properties, dealing with tenants, and collecting payments.  Private investors will be responsible for rehabbing and maintaining the properties, and the rents and profits from the ultimate sale will be shared with Fannie and Freddie.  This is considerably more socialistic than the first proposal, but whichever proposal is ultimately implemented, this whole concept really stinks.

Why?  Because without a lack-luster economy and excessively high unemployment fueled by job-killing policies, many of these homes would not be in foreclosure in the first place.  And without the onerous provisions of the Dodd Frank bill which set federal underwriting guidelines, discriminate against small business providers of mortgage credit, and create qualified residential mortgage standards which shut a majority of Americans out of the mortgage market, the homes that are in foreclosure would be sold to private citizens wanting to purchase a home.  At a time of historically low interest rates and amazingly low housing prices, Americans are choosing not to purchase homes because they can't qualify for financing--not because they no longer believe in the value of homeownership.

And now the same government that created the problem in the first place is giving us the "solution".  If you think this through, what the government is doing with housing really amounts to one of the largest transfers of wealth in the history of our nation.  Over one million single family residences will be sold to investors, hedge funds, Wall Street, and corporate raiders.  Earlier this week, Warren Buffett made a public statement that he supports the White House's plan for higher taxes on the rich, saying that it is time that he and his top tier buddies started paying their share.  The timing made me wonder if this man, who has made billions profiting on the misfortunes of others, is now poised to profit once again by purchasing America's housing inventory at pennies on the dollar.

When the real estate market comes back, and it definitely will, these investors will have purchased these homes at rock bottom prices.  If current housing regulations remain in place and homeownership remains beyond the reach of middle-class Americans, the investors who own these properties can rake in huge profits as landlords.  If Dodd-Frank is repealed in a few years and Americans again start purchasing homes, the corporate investors can sell off their inventory at a healthy profit.  Either way, they win.

And either way, the American homeowner loses.  Right now, many Americans don't see the value of keeping their homes.  Financial experts such as Suze Orman are encouraging U.S. homeowners to walk away from their homes in a "strategic default."  From reading the comments that I receive on my post, "Suze Orman is Wrong--Don't Walk Away," I see that many advocates of strategic default believe that by abandoning a home, the homeowner is some how "sticking it" to the bank.  In reality, the banks are going to be just fine.  When they sell these homes in packages for the balances owed, they will recover their losses.  The investors they sell them to will make a fortune.  But many of the homeowners who have lost their homes--either through misfortune, or unemployment, or personal choice--will never be able to purchase another home again.  They will be renting for the rest of their lives, having lost or abandoned their biggest asset.

If the housing crisis of 2011 were a movie, the hero would uncover and expose this shameful scheme and save the day. But in the real story, there is no hero to ride to the rescue.  We just have to sit by and watch while the federal government accomplishes one of the greatest heists in history.

For more by Alexandra Swann, visit her website at

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