Wall Street Sees Profits In Renting Foreclosures…

On Tuesday, Reuters reported on the potential for hedge funds and private equity firms buying up foreclosed homes – primarily from government owned Fannie Mae & Freddie Mac – and renting them out.

With the U.S rental market “red hot”, investors believe the foreclosed homes could offer returns of 8% - 25% as rental units. Now, firms are beginning to line up for the opportunity to bid on the 200,000+ foreclosed homes Fannie and Freddie have stockpiled – with more to come.

As I mentioned in my last blog (Bank Of America Defrauded HAMP), it’s hardly shocking to learn that the very people who helped create this mess will now profit from it, at the expense of the middle and lower working class.

For decades, it’s been the American dream to own your own home. For a good chunk of that time, it became a reality for more and more families. Then, things got carried away: Banks provided mortgages to people they knew couldn’t afford them; Appraisers inflated the true value of properties; People overextended themselves, as prices skyrocketed.

In the end, it probably makes sense for many to become renters again – we tried to provide homeownership to the masses and it didn’t work. In time, I hope we’ll be able to figure out a better way to go about it and try again.

Until that time comes, hundreds of thousands of former homeowners are set to become renters. And hundreds of investment firms are set to become landlords.

Scary. Why does it make sense that many of these firms with close ties to a banking industry that arguably had the largest hand in contributing to the housing crisis, should not only escape any real liability, but also profit from it?

If private investment firms become landlords, I think we can all agree flexibility will be at a minimum. As long as unemployment stays high and the economy remains shaky, there will be a need to assist people in navigating the various hiccups in employment that are a bi-product of the current economic environment.

Worse, I’d have no trouble believing homes will be flipped as needed when the potential for additional profit arises, likely without giving the tenant the benefit of, well, anything – notice, compensation, etc. What about the laws you say? Sure, those have proven to go a long way towards protecting homeowners over the past few years.

If a government entity were created to manage the current portfolio of homes, it might provide a little more stability to the real estate market. Working to keep people in their homes, as opposed to evicting them the moment financial issues arise or “opportunities” for greater investment are presented, will do far more to drive home values up and allow communities to remain vibrant. It won’t take values as high as they went over the course of the past decade, but we’ve all seen how that strategy worked out.

I see nothing wrong with selling a portion of the current backlog of homes to private investment firms if a decent profit can be turned. However the overwhelming majority should remain as government owned rentals. They’ll likely make just as much money on the properties via rental income versus a quick sale at the bottom of the market. More importantly, it might provide some much needed stability to families and communities…