More Big Government for Big Business

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The FHFA says more than 4,000 responses were received. Still, the one comment that stands out in the FHFA news release is that several respondents “demonstrated their technical and financial capability to engage in large-scale transactions” with Fannie, Freddie and FHFA.

The basic plan emerging involves:

• Requiring investors to rent the properties for a still to be determined period of time that is expected to be multi year.
• For Fannie and Freddie to either provide direct financing to investors or guarantee loans from banks and financial institutions.
• Required rehabbing of the properties to government specifications.
• Encourage big banks with large foreclosure holdings to aggressively enter the rental market as landlords.
• Provide on going government oversight of each house even after the rental period ends and it is sold to an end buyer.

The news release also states, “Only a few market participants have developed the necessary infrastructure and capabilities to manage dispersed single-family rental properties. With assurance of a continued flow of new REOs, respondents suggested additional firms will make the necessary investment and develop that capability.”

What is clearly missing is any support for small businesses to participate in the program. Fannie and Freddie currently have approximately 200,000 foreclosures on their books. When the banks are included, the number jumps to about 500,000. Additionally, another 3.4 million houses are expected to be foreclosed in the next couple of years. How this FHFA program plays out will have ripple affects on big and small real estate investors everywhere and a Tsunami affect in the hardest hit regions.

Small Businesses That Could Potentially Prosper

Locking out smaller investors will not be good. Big banks and big businesses will own large rental holdings and could potentially set the rental rates for some regions of the country. Right now, it’s difficult to tell if rental rates are likely to go up or down. The last two years have seen rent rates gradually increasing as more and more people are forced to rent rather than buy.

With hundreds of thousands of rental properties entering the market, the supply side might over power the demand side of the equation. Forcing rental rates down. On the other hand, having a few big businesses set rental rates may push prices higher so the big businesses can make profit targets.

Local remodeling and construction businesses can expect to see more work as these houses reenter the markets. Because the construction companies in london is the hardest hit by unemployment, it might not exactly prosper but it will improve over what it has been for the last several years. Businesses that used to only do new construction are likely to enter the rehab sector as it grows to accommodate the hundreds of thousands of badly damaged foreclosures.

One bright spot is the property management sector. One reason banks haven’t been renting out foreclosures in big numbers is because they are not positioned to be landlords. Being a landlord comes with unique liabilities and risks that banks are not structured to take on. They will have little choice other than relying on established local property management companies to deal with tenants, clogged toilets, and 2 a.m. telephone calls.

The silver lining in this big government – big business plan is that at least something will be done to take the excessive inventory of houses off the market. Once all of the details are known and if they successfully implement a plan, house prices should stabilize. If large numbers of foreclosures are relegated to the rental market for several years, sale prices should go up when buyers aren’t afraid values will drop from more and more foreclosures going up for sale.