Another Hidden Bailout

By Matt Taibbi, Rolling Stone

20 March 12

ere's yet another form of hidden bailout the federal government doles out to our big banks, without the public having much of a clue.

This is from the WSJ this morning:

Some of the biggest names on Wall Street are lining up to become landlords to cash-strapped Americans by bidding on pools of foreclosed properties being sold by Fannie Mae... 

While the current approach of selling homes one-by-one has its own high costs and is sometimes inefficient, selling properties in bulk to large investors could require Fannie Mae to sell at a big discount, leading to larger initial costs.

In con artistry parlance, they call this the "reload." That's when you hit the same mark twice – typically with a second scam designed to "fix" the damage caused by the first scam. Someone robs your house, then comes by the next day and sells you a fancy alarm system, that's the reload.

In this case, banks pumped up the real estate market by creating huge volumes of subprime loans, then dumped a lot of them on, among others, Fannie and Freddie, the ever-ready enthusiastic state customer. Now the loans have crashed in value, yet the GSEs (Government Sponsored Enterprises) are still out there feeding the banks money through two continuous bailouts.

One, they continue to buy mortgages from the big banks (until recently, even from Bank of America, whom the GSEs were already suing for sales of toxic MBS), giving the banks a permanent market for home loans.

And secondly, they conduct these quiet bulk sales of mortgages, in which huge packets of home loans are sold to banks at a "big discount."

By now we've come full circle. Banks create the loans, make money selling them off on the market at high prices, then come back and buy them again when they're low. When the GSEs are in the middle of this transaction, it makes mortgage lending a basically risk-free proposition: Banks get paid for creating home loans and they end up owning valuable property on the cheap, but in between, they offshore the market risk to a government entity and/or to the idiot individual who bought the home mortgage in the first place.

Even better, many of the banks/investors who buy these home loans back from Fannie/Freddie will rent out their properties instead of reselling them, which can vastly increase their revenue streams. From the WSJ:

Economists at Goldman Sachs estimate the annual yield on an investment on rental property nationwide averages about 6.3%, but can exceed 8% in cities that were hit hard during the housing bust, including Las Vegas, Detroit and Tampa. By contrast, mortgage bonds have average yields of just over 3%, and investment-grade corporate bonds are yielding about 3.5%, according the Barclays Capital U.S. Investment-Grade Index.

It gets better:

Warren Buffett, considered a sage investor and chief executive of Berkshire Hathaway Inc., said in an interview with CNBC-TV last month that he would buy up "a couple hundred thousand" single-family homes if he could do so easily, given the high yields on rental investments.

Another potential buyer, according to the article, is John Paulson, the pillaging hedge-fund billionaire who was behind Goldman's notorious "Abacus" deal (in which Goldman allowed Paulson to pack a portfolio full of loser mortgages he was shorting before those same mortgages were dumped on a pair of Euro banks).

So congratulations, America, your quasi-governmental housing entity is about to subcontract out mass-landlording/slumlording jobs to the likes of John Paulson and Warren Buffett, so that they can add to their bottom lines collecting rent payments in the middle of a nationwide housing slump.

As one hedge fund analyst put it to me this morning: "Help inflate the bubble, create a foreclosure crisis, buy homes in bulk, and rent them out to the same average homeowner."

Is this what we had in mind when we created the "ownership society" – helping billionaires collect your rent?