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Investor Purchases of Foreclosed Properties Continue

Yestreday, Fannie Mae sold off another chunk of its foreclosed properties as part of a pilot program to process bulk sales to investors who will rent them out in the short term. The beneficiary was a private equity firm.

The Cogsville Group, a New York-based firm led by former professional soccer player Donald Cogsville, reached an agreement to buy the properties from the government-controlled mortgage giant in a joint venture deal worth $11.8 million.

The deal, announced Tuesday, is the second completed bulk sale of foreclosures held by the mortgage finance giant.

In an interview, Mr. Cogsville said the investment offered attractive returns in the form of rental income and the “opportunity to do some real investment in these homes.”

Mr. Cogsville’s firm has been a big investor in distressed real estate, buying loans and other assets from the Federal Deposit Insurance Corp.

This is part of the emerging trend I’m seeing in the housing market, with institutional investors like hedge funds and private equity firms, armed with borrowed money, swooping in and paying cash for distressed or discounted properties, in order to rent them out in the short term and sell them in the long term. The government has encouraged this with bulk sales like this one from Fannie Mae. Apparently the bulk sales have run into more trouble at Freddie Mac, because their regulator, the FHFA, doesn’t want Freddie making cheap loans to the investors to cover the deals. But notice the main concern here (emphasis mine):

The government-backed mortgage giant is pushing to finance such investors to help jump-start a housing recovery. But the Federal Housing Finance Agency has put those plans on hold, concerned Freddie’s cheap debt would make it difficult for banks to compete for the growing number of buyers of foreclosed homes, people familiar with the proposed financing said. The FHFA also worries Freddie’s involvement would deepen the government’s role in the nation’s real-estate economy.

In other words, there’s tons of demand for the scrap heap properties, and Freddie shouldn’t give them away with cheap loans to crowd everyone out. As the article says, “Investors have raised billions of dollars in equity to buy homes to then rent out.” They’d rather do it with debt, but they’re happy to use equity too.

In other words, this is a flush market. In addition to the $8 billion in equity raised for this purpose, there are at least two cases of major banks like Citigroup lending investor groups the capital to make more purchases (the initial Citi loan to Waypoint Real Estate was for $65 million, with more to come). It’s a total land grab, and it’s just getting started. Investors may not get a lot of homes through these Fannie/Freddie bulk sales, but they’re active in the foreclosure auction markets and in short sales, scooping up properties one by one.

The investor purchases have stabilized the housing market on prices and accounts for a lot of the optimism you say. I’ve laid out previously why there are plenty of concerns about hedge funds and private equity firms turning into landlords.

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David Dayen

David Dayen