“The largest transfer of wealth from the public to private sector is about to begin. The federal government will be bulk-selling the massive portfolio of foreclosed homes now owned by HUD, Fannie Mae and Freddie Mac to private investors – vulture funds.”
So warned Roger Arnold, chief economist for ALM Advisors of Pasadena, California, in a column for RealMoney on August 11, 2011, that first lifted the lid on this latest colossal scandal to come out of the 2008-2009 financial crisis.
“These homes,” wrote Arnold, “which are now the property of the U.S. government, the U.S. taxpayer, U.S. citizens collectively, are going to be sold to private investor conglomerates at extraordinarily large discounts to real value. You and I will not be allowed to participate. These investors will come from the private-equity and hedge-fund community, Goldman Sachs (GS) and its derivatives, as well as foreign sovereign wealth funds that can bring a billion dollars or more to each transaction.”
Warren Buffett, one of the richest men in the world, obviously, would have no trouble qualifying for the privilege of bidding in this fire sale for the super-rich. And the “Oracle of Omaha” appears to be more than casually interested in getting in on the game.
The Wall Street Journal reported on March 20, 2012: “Warren Buffett, considered a sage investor and chief executive of Berkshire Hathaway Inc., said in an interview with CNBC-TV last month that he would buy up ‘a couple hundred thousand’ single-family homes if he could do so easily, given the high yields on rental investments.”
A couple hundred thousand homes for Buffett? What about the hundreds of thousands of families who are being foreclosed on? Isn’t that what the Fed, Treasury, the Bush White House, and members of Congress told us the $750 billion TARP (Troubled Asset Relief Program) fund was for when they forced it on us in 2008? What about the additional hundreds of thousands of families who would love to be able to purchase these homes and who may be qualified to buy under a genuine privatization program open to all? What about the hundreds of thousands of small investors who are willing to buy, rehabilitate, and rent out these properties? Well, the folks running Fannie, Freddie, and HUD haven’t completely ruled out the little guys; they are continuing to sell a portion of their mammoth inventory of foreclosed homes the traditional way, one-by-one to individual buyers. But over the past year, they have been moving into bulk sales and have been getting ready to unload their portfolios en masse at huge discounts to the big buyers.
Who are some of the other high-rollers lining up for the restricted Fannie/Freddie/HUD fire sale? According to the Wall Street Journal, they include Lewis Ranieri, regarded as “the godfather” of mortgage finance for developing mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs), the financial weapons of mass destruction that played a key role in the economic meltdown.
Another, says the Journal, is hedge fund titan Paulson & Co., headed by John Paulson.
Forbes magazine, which in 2012 listed Paulson as #61 among the world’s billionaires and #17 among the “Forbes 400,” says that he “became a billionaire in 2007 by shorting subprime securities, earning a $3.5 billion payout.” What Forbes doesn’t mention in its flattering profile is that Paulson, like Ranieri, was a major architect of the house of cards built on CMOs and other fraudulent debt instruments – euphemistically called “synthetic derivatives” – that Paulson marketed through Goldman Sachs.
And, of course, the power brokers at Goldman Sachs, JPMorganChase, and Citigroup, who have already reaped billions of taxpayer and investor dollars from the financial havoc they helped cause – as well as from the bailouts that followed – are salivating at the thought of even greater lucre to be made in the newly created homes-for-rent market.
“Economists at Goldman Sachs estimate the annual yield on an investment on rental property nationwide averages about 6.3%, but can exceed 8% in cities that were hit hard during the housing bust, including Las Vegas, Detroit and Tampa,” notes the Journal. “By contrast, mortgage bonds have average yields of just over 3%, and investment-grade corporate bonds are yielding about 3.5%, according the Barclays Capital U.S. Investment-Grade Index.”
Incredibly, the malefactors who invented the toxic mortgage securities and raked in massive wealth by marketing those fraudulent products with a “pump-and-dump” strategy that fleeced millions of savers, investors, and homeowners are now planning to use their ill-gotten gains to once again make a killing. And, once again, this is only possible because the Federal Reserve has instituted a corrupt system of cronyism that amounts to legalized theft on a titanic scale.
These privileged mega-investors could “instantaneously become the largest improved real estate owners and landlords in the world,” notes Roger Arnold. “The U.S. taxpayer will get pennies on the dollar for these homes and then be allowed to rent them back at market rates.”
The Fed’s REO Speedwagon
The REO program to pulverize Main Street for the benefit of Wall Street would go nowhere without approval from Chairman Ben Bernanke and his fellow governors at the Federal Reserve. On April 5, 2012, the Fed issued a policy statement loosening regulations so that “banking organizations may choose to make greater use of rental activities in their disposition strategies.” This will make it easier for banks – including those that received billions of taxpayer dollars – to hold REOs off the market as rentals for 10 years, or longer. This was a follow-on to the Fed’s white paper on housing issued by Bernanke on January 4, 2012, that painted a dire picture of the real estate market and expressed the need to look at new options.
The paper, entitled The U.S. Housing Market: Current Conditions and Policy Considerations, declares: “Looking forward, continued weakness in the housing market poses a significant barrier to a more vigorous economic recovery.”
The Fed’s white paper notes:
At the same time that housing demand has weakened, the number of homes for sale is elevated relative to historical norms, due in large part to the swollen inventory of homes held by banks, guarantors, and servicers after completion of foreclosure proceedings. These properties are often called real estate owned, or REO, properties…. Perhaps one-fourth of the 2 million vacant homes for sale in the second quarter of 2011 were REO properties. The combination of weak demand and elevated supply has put substantial downward pressure on house prices, and the continued flow of new REO properties – perhaps as high as 1 million properties per year in 2012 and 2013 – will continue to weigh on house prices for some time.
Additionally, it points out that “currently, about 12 million homeowners are underwater on their mortgages – more than one out of five homes with a mortgage.” Presumably, many of these will also end up in foreclosure.
But Bernanke and his Fed brethren, naturally, have a solution. They claim “a government-facilitated REO-to-rental program has the potential to help the housing market and improve loss recoveries on REO portfolios.”
But, to add audacity on top of audacity, the Fedmeisters hint that besides favoring a closed privatization scheme that turns over an REO bonanza to their cronies (who have already benefited immensely from the Fed’s crooked largess), they may also be setting the program up for us, the taxpayers, to help finance the deals for the billionaire investors! The Fed white paper informs Congress that “providing investors with debt financing will likely also affect the prices they offer on bulk pools of REO properties.”
“Subsidized financing provided by the REO holder may increase the sales price of properties,” the Fed advises, appearing to suggest that it would be to the benefit of all concerned if the taxpayers sweetened the saccharin deal even further.
President Obama, who likes to inveigh against Wall Street (while taking record sums of Wall Street cash as campaign contributions), is on board with the plan. “The Obama administration, in conjunction with federal regulators and led by the overseer of Fannie Mae and Freddie Mac, are very close to announcing a pilot program to sell government-owned foreclosures in bulk to investors as rentals, according to administration officials,” Diana Olick reported for CNBC on January 9, 2012, in a piece entitled “White House wants to convert foreclosed houses to rentals.”
“A pilot sales program will be starting in the very near future, according to administration officials,” Olick reported. “They are working on what the market potential is, what pricing would be, how government can partner with private investors, and who has the operational experience to manage so many properties.”
RTC Déjà Vu
The federal agency that is handling the disposition of the huge federal REO inventory is the Federal Housing Finance Agency (FHFA), created by the Federal Housing Finance Regulatory Reform Act of 2008 (Public Law 110-289), which was signed on July 30, 2008 by President George W. Bush. The FHFA is “the Resolution Trust all over again – but much bigger,” ALM economist Roger Arnold told The New American. “And you can be sure the corruption will be commensurately bigger.”
For those who recall the massive Savings & Loan crisis and bailout of the 1980s, there is more than a passing resemblance to the current financial crisis and bailouts. And the FHFA does indeed look disturbingly similar to the Resolution Trust Corporation (RTC), created by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (which was signed into law by President George Bush, the elder) to “resolve,” i.e., clean up, the S&L mess.