Diana Olick broke the news this morning that the Obama administration is very close to announcing a plan that would sell government-owned foreclosed properties in bulk to investors who intend to use them as rental properties. The hope is that by taking this inventory out of the sale pipeline, the program could help the broader housing market recovery more quickly.
This idea has a lot of support among some of the biggest real estate investors in the country. I first heard it touted at CNBC's Delivering Alpha conference in September during a panel with Bill Ackman of Pershing Square, Sam Zell, chairman of Equity Group Investments, and Barry Sternlicht, the chairman and CEO of Starwood Capital Group.
Ackman, Zell, and Sternlicht all sounded interested in the idea, but raised a number of challenges. The first is that it is simply more expensive to service single-family rental homes than large apartment buildings. The second is that because there is not much experience in this area, banks are hesitant to finance the purchases.
This is one reason I suspect that the Obama administration's plan will likely involve a subsidy for the investors. Most likely, the government owners of the foreclosed property — such as Fannie Mae and Freddie Mac — will guarantee at least a portion of the loans made to the investors. Since the loans will be backed by the full faith and credit of the U.S., banks should be willing to finance the purchases at interest rates low enough that the investors can see a profit.
To put it another way, in the name of supporting home prices, the Obama administration will likely put in place a system under which investors make private profits while the taxpayers subsidize the risk.
Because of this subsidy, regulators are likely to require that investors who purchase the properties meet a variety of criteria demonstrating that they are "qualified investors." They'll likely have minimum capital requirements, minimum years servicing rental properties, and complex disclosure mandates.
No doubt all of these are necessary to prevent fly-by-night investors from ramping up risk on the taxpayers dime. But the qualified investor criteria will also serve to lock-in already established real estate investors such as Zell and Sternlicht, while keeping out potential newcomers. The regulatory apparatus will create barriers of entry.
This is the kind of program that we'll want to monitor closely. It has the potential to become a giant giveaway to financiers.
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