CNBC recently reported that millions of Americans who lost their homes in foreclosure are driving demand in the rental market. So much so that Oliver Chang, Morgan Stanley’s head of U.S. housing strategy and research believes it is time for institutions such as hedge funds and private equity to enter the Single Family Rental market.

October 2011

Are the rumors true that the U.S. government is going into the landlord business? Probably not, but Wall Street might.

Mortgage giants Fannie Mae and Freddie Mac, along with the Federal Housing Administration (FHA), are currently holding approximately 250,000 foreclosed homes. That’s roughly half of all unsold, repossessed properties – making the federal government the largest owner of REO (bank-owned) inventory in the country!

Plus, these government-backed agencies may soon be forced to repossess 830,000 more homes currently in some stage of foreclosure.

What’s a government to do with so many distressed properties?

Unloading them into the market would only further depress values, while damaging the fragile U.S. economy that depends on real estate stability. Holding the homes vacant leaves them vulnerable to vandalism and disrepair.

One suggested solution is for the government to mimic successful real estate investors and rent them out! Millions of former homeowners who lost their homes to foreclosure are now becoming renters and need housing. The cash flow on rental property is at all time highs so it would be a profitable business. But who will profit?

The FHFA (regulator of Fannie and Freddie) have been accepting RFI’s (Requests for Information) from the public for ideas on what to do with all the government-owned foreclosed homes.

At first glance, it sounds like the government genuinely cares about our opinion. In reality, unless you’ve got a billion bucks in your pocket and some insider handshakes, you probably won’t get to play this game.

Even if you submitted your RFI, corporations with billions of dollars will most likely win the opportunity to buy Fannie and Freddie’s inventory at rock bottom prices. In fact, it appears that the RFI process was actually set up by them.

If they get their way, investors from the private-equity and hedge fund community, like Goldman Sachs and company, will instantly become the largest land owners and landlords in the country. They will get to buy US taxpayer-owned properties in bulk for pennies on the dollar. It would be the greatest transfer of wealth from the public to the private sector if Fannie and Freddie are allowed to sell off their massive portfolio of foreclosures to private investors on Wall Street.

If the US taxpayer technically owns these properties, shouldn’t qualified U.S. citizens be the benefactors? If properties are going to be released for pennies on the dollar, shouldn’t the free market be involved in that? And, if the properties were meant to be rented, shouldn’t experienced real estate professionals handle it instead of Wall Street? We already know what happens when those guys dabble in industries they don’t understand.

It’s not too late to put up a fight. The FHFA is still reviewing the proposals and has not yet made a final decision. Members of Congress need to know they can’t get away with this without serious backlash from their constituents!

What does all this mean to real estate owners and investors?

If you are thinking that the housing crisis will continue indefinitely, think again. Obama will need to clean up the housing mess if he hopes to get re-elected next year. One way to do that is to sell off the government-owned inventory to large financial institutions who would rent them.

Another way he’s doing that is putting pressure on banks to modify loans or accept short sales.

These actions will dramatically reduce inventory, which will most-likely increase demand. More demand means higher prices, which is good for owners and sellers – not as good for buyers.

If you are a looking to buy discounted property, don’t wait just because you’re expecting future lower prices from a double dip recession in housing. Due to government interference, the opposite could be true.

By: Kathy Fettke, renowned real estate professional and host of her own radio show on KABC in LA; and Greg Uehling, property consultant in Australia.

Sales of existing homes in September were up a whopping 11.3% from last year at this time, according to data released by the National Association of Realtors (NAR) this morning. That’s significant, considering buyers were eligible for the $7000 first-time homebuyer credit until the end of September last year. Remember? The tax credit allowed a first-time buyer to put just $7000 down on a $200,000 home purchase using an FHA loan, and then receive $7000 back from the government – essentially a no money down deal.

And even more enticing: a buyer of a $100,000 property could have put $3500 down and still be reimbursed the $7000! They could receive $3500 cash back from the government for buying a home with no money down.

The fact that this year’s sales were up 11% in September compared to last year, without the $7000 tax credit, is a very positive sign.

When we get October sales data next month, we will finally be able to compare apples to apples, since last October the tax credit was expired. We’ll have a better gauge of the real estate market with less government interference.

Also of interest in NAR’s report: contract failures were double this month compared to this time last year. This tells us the demand is there, but financing is not. Not surprisingly, one of the main culprits is government interference again – this time regarding appraisal policies.

The new HVCC laws prohibit realtors and mortgage brokers from choosing their appraiser, and instead, are required to use a third party appraisal management company. While this was created to protect the consumer, in reality, the opposite is true. Now the consumer pays more for a less accurate appraisal.

Why? The appraisal management company acts as a middle man, and therefore takes half the appraisal fee. This makes it difficult for experienced appraisers to stay in business, so many closed up shop.

As a result, new and inexperienced appraisers willing to work for half the fee are being assigned to the job. Often they are sent out of town, driving hours to a location they don’t know or understand.

Being new to the market, they don’t know a good neighborhood from a bad one, and are forced to rely on recent sales. When 30% of sales are from distressed property, the comparative values will often come in lower then market value.

Low pay also requires appraisers to get the job done in half the time, eliminating the time for proper research. Are they comparing a beat up house with a fully renovated one? Is one vandalized in a high crime area, while the other is in great shape in a good school district? They may not have the time, knowledge or resources to find out. This, of course, results in lower appraisals on higher-valued properties, and buyers are simply unwilling or unable to pay the difference in cash.

Even if the appraisals came in right, contracts might still get cancelled. Banks don’t have a secondary market to sell off their loans to anymore, so they no longer have an unlimited supply of money to lend. This is one of the reasons qualified buyers are denied loans for no good reason. Many banks just don’t have the capital.

That’s why 30% of sales are going to cash buyers

Investors know that when financing is tight, the masses can’t buy and prices decline. In many areas, they can purchase property at half the cost to build. They’re happy to pay cash now and refinance later.

If you have cash or a self-directed IRA, certainly consider buying high income-producing real estate today. You can enjoy the cash flow now, and then when financing loosens up, more buyers will be in the market and inventory will burn off. Since building has come to a halt, there will actually be a shortage of homes, which will increase home prices at least to the cost to build

Institutional lenders are getting into that game now, allocating some of the billions of dollars they’ve had sitting on the sidelines to pick up discounted properties.

The little guy is benefiting from low home prices too. 32% of buyers are purchasing a home for the first time. These folks are locking in a historically low interest rate (4.1%) with a fixed payment for 30 years on reduced home prices. This is a welcome relief to former renters who were watching their lease payments increase every year.

In fact, in many parts of the US, it costs much less to own than to rent. In these areas, new homeowners are increasing their monthly cash flow while paying down their mortgage. If they keep that up, someday they will join the ranks of comfortable retirees who own their homes free & clear.

By: Kathy Fettke, renowned real estate professional and host of her own radio show on KABC in LA; and Greg Uehling, property consultant in Australia.