Bulk Sales of Foreclosed Single Family Homes

November 5, 2012  

Congressman Brad Sherman

5000 Van Nuys Blvd. - Suite 420

Sherman Oaks, CA 91403

Dear Congressman Sherman:

I live in the 27th Congressional District. I know you sit on the House Financial Services Committee and its Subcommittee on Capital Markets and Government Sponsored Enterprises, and I know that you also sit on the Subcommittee on Insurance, Housing and Community Opportunity.

Therefore, it seems appropriate that I bring a concern of mine to your attention.

My concern: While reading an article published in the Wall Street Journal on October 2, 2012 titled, New York Firm to Buy Fannie Foreclosures By Alan Zibel, I noticed the author mentioned the terms were the same for both of Fannie Mae’s first two ‘bulk sales’ (of foreclosed single family homes).  An outline of the terms of the deals was provided in the article (the last four paragraphs of the article).

It seems the terms of these first two bulk sales may lead to an uncertain, and very long payback period to for the GSE’s - and an even riskier and even longer payback period for any investor(s) that might be the source of funds for the managers of these deals. As long as the deal terms are fully-disclosed to the fund's (voluntary) investors their investments are their business.  

However, because of the history of Federal Housing Policy, and because of the history of the GSE’s, I believe deals such as these should be designed in a way which can actually be expected to produce rapid and less risky payment of the purchase price, than it appears the terms of the first two deals will produce.

I hope the committees you sit on will very closely review and monitor these two existing deals, and that you will have independent evaluators advise on, and audit, the structure and payment of future bulk sales of foreclosed single family homes. 

The bulk sale of foreclosed single family homes is a serious concern for homeowners, neighborhoods, and for local legislators. I believe the future financial success of these bulk sales is a critical element of the bulk sales strategy.

In the context of the GSA’s, it appears the terms of these first two deals were designed to move foreclosed homes off the GSE’s balance sheet, and to claim the 'sales agreement' as an asset.

Thank you very much for this opportunity to express my concern.

Sincerely,

Bill George

Cc. Congressman Gary Miller

2349 Rayburn House Office Building

Washington, DC  20515

 

Background Information:  

(1) Private Equity’s Foreclosure Binge (& Purge) By Michael L Boyer pub. at Seeking Alpha, October 23, 2012 - at: http://seekingalpha.com/article/941291-private-equity-s-foreclosure-binge-purge#comments_header 

(2) The Institutional Home Buying Bubble By Bill George - Posterous - at:
http://billsplace.posterous.com/the-institutional-home-buying-bubble

  

Fraud at the GSE's?

I commented on an interesting article published September 14, 2012 in the Wall Street Journal, How Greenspan Misread the Risks at Fannie and Freddie. It’s an article based upon an excerpt (written by James Hagerty) from his new book The Fateful History of Fannie Mae: New Deal Birth to Mortgage Crisis Fall By James R. Hagerty.

My Comment:

In December of 2011 the SEC filed lawsuits against several former executives of Fannie Mae and Freddie Mac. One of the allegations in both of the two lawsuits is that former executives of Fannie and Freddie mis-categorized mortgage loans that were being bought by Fannie and Freddie and that they failed to inform investors and Fannie and Freddie’s regulator [The Office of Federal Housing Enterprise Oversight] of the true number (percentage and value) of Sub-Prime and Alt-A loans they purchased.

So, it’s not that shocking that most people who believed what Fannie and Freddie were telling them didn’t know of the significant default risk.

Only people like Michael Burry(2) Laurence Fink(3) John Paulson(4) and perhaps Stanford Kurland(5) who actually studied (or were aware of) the progressively diminishing mortgage qualification standards as the bubble formed, and who studied (or were aware of) the actual mortgage borrower income statistics, were prescient enough to become alarmed about Fannie and Freddie’s exposure to default risk.

Based upon what Fannie and Freddie were claiming as their mortgage loan quality, It should be no surprise that Alan Greenspan, John McCain, George W. Bush, Treasury Secretary, John Snow and the Office of Federal Housing Enterprise Oversight [OFEO] were more concerned about the impact of credit rate risk and accounting fraud at Fannie Mae and Freddie Mac than they seem to have been about default risk.(6) 

Footnotes:

(1) Reference SEC Website SEC CHARGES FORMER FANNIE MAE AND FREDDIE MAC EXECUTIVES WITH SECURITIES FRAUD.  

(2) Reference, Betting on the Blind Side By Michael Lewis – pub. Vanity Fair Magazine | April 2010. 

(3) Reference, Inside the Trillionaires Club at BlackRock pub. Forbes Magazine August 17, 2009. From the article: 

LESSON 2: When investments get complex, do your homework: 

. . . In late 2006 the company developed a model that put a lower, more realistic number on the incomes subprime borrowers were claiming on their "no doc" loans. The projections were shocking: BlackRock figured that when the loans reset to their new, higher rates in a couple of years, most borrowers would be spending more than half their real incomes on mortgage payments. Foreseeing an avalanche of defaults, BlackRock dumped subprime bonds in early 2007 when the prices were still lofty.

(4) See, John Paulson, Trader Made Billions on Sub-Prime By Gregory Zuckerman pub. Wall Street Journal January 15, 2008. 

(5) See, Stanford Kurland - Former Countrywide No.2 Sees Opportunity in Troubled Mortgages By Matthew Padilla Orange County Register - June 10, 2008.   From the article:  

Q. How did this venture come about?

A. I was somewhat in a state of retirement. I left Countrywide in 2006 after 27 years. From the sidelines, I was watching the mortgage market meltdown and was in communication with associates of mine over what it was going to take to improve or revitalize the mortgage market. Wall Street firms were reaching out to me on whether I had an interest in participating with them. I got a call from the chairman of BlackRock, Laurence Fink, who asked if I would meet a group of executives who were talking about how to address issues in the mortgage market, and they were working with another company (Highfields Capital Management).
I was very receptive to talking to Larry Fink. We had grown up together and have been friends since grade school days.

Q. Where did you and Mr. Fink grow up?

A. We grew up in Van Nuys. That’s the valley. 

(6) See, YouTube video-clip, Timeline: George Bush, John McCain Warn Democrats of Housing Crisis, at: