The New Bubble: Profiting from Foreclosures

by 27 Mar 2012

( -- 3/27/2012 -- Seasoned Wall Street investors always manage to find a silver lining, including in the drastic downturn of the American real estate market and the credit crunch. The foreclosure avalanche of the last few years is drawing investors towards distressed properties that can be put on the burgeoning rental market. It's not just individual landlords who are rushing to purchase foreclosed homes; investment giants like Berkshire Hathaway and Starwood Capital are weighing also weighing their options and are expected to join the new financial frenzy.

It's easy to see why investors are deciding to take the plunge. In many regional real estate markets across the United States, purchasing a home is actually cheaper than renting, but American families are not quite convinced yet. The rental market is heating up, and thus it makes sense to some investors to purchase distressed homes and become landlords. It's not the monthly rent payments that are attracting investors, however; it is rather the investment activity that is taking place in the offices of boutique and institutional investment firms.

An Oversupply of Foreclosed Properties

Between the government-sponsored mortgage investment companies Fannie Mae and Freddie Mac, the number of foreclosed homes they currently hold is about 200,000. The foreclosed real estate holdings of retail and commercial mortgage lenders is more than 600,000. If the numbers do not add up is because of the impasse caused by the accusations presented against the five major mortgage lenders in the U.S. by various state attorney generals and federal authorities.

Noe that the prominent mortgage lawsuit has been settled, real estate analysts expect that foreclosure activity will resume across the United States. This will in turn bring an even higher number of foreclosures to the real estate owned (REO) portfolios of Fannie, Freddie and the private mortgage lenders.

Some real estate experts indicate that the major reason for the stagnant REO market is the lack of interest by major investors, but that is quickly changing. According to the Federal Housing Finance Agency (FHFA), there is a lot of interest by investors with ties to Wall Street in purchasing foreclosed homes now.

The FHFA and Fannie Mae will test the waters of this new financial trend in April, when 2,500 foreclosed homes now owned by the government-sponsored mortgage entity will be put on the auction block. This will be a pool of properties, similar to the mortgage pools that Wall Street investors went crazy for prior to 2008.

The number of bids received by the FHFA is staggering. Over 4,000 bids have been tendered, from different types of investors. The fact that most of the properties have been managed by Fannie Mae, and that most of them are under rental agreements, is attracting investors. Many of the homes up for auction are in major metropolitan areas.

The Silver Lining

While these homes are no longer in foreclosure and are well maintained, investors are unlikely to hold on to them for very long. Wall Street professionals are not interested in becoming landlords.

The lease agreements may be considered nice cash flow vehicles, but the real reason investors are drawn to these properties is the fact that other investors are also buying. Foreclosed homes with rental agreements are destined to become like the mortgage-backed securities of yore: financial instruments that can be marketed and traded in open markets.


Should CFPB have more supervision over credit agencies?