Freddie Mac Foreclosure Plan Hits Roadblock

Investor Update: On October 3, The Wall Street Journal published an article entitled Freddie's Foreclosure Plan Hits Roadblock.  According to the article, Freddie Mac's plan to help jump-start a housing recovery was put on hold by the Federal Housing Finance Agency (FHFA). The FHFA has concerns regarding bank competition as well as the government's role in the real estate economy.

Freddie's Foreclosure Plan Hits Roadblock

Freddie Mac is engaged in a tug of war with both its regulator and Wall Street over a plan to provide loans to investors that are buying homes in foreclosure to rent them out.

The government-backed mortgage giant is pushing to finance such investors to help jump-start a housing recovery. But the Federal Housing Finance Agency has put those plans on hold, concerned Freddie's cheap debt would make it difficult for banks to compete for the growing number of buyers of foreclosed homes, people familiar with the proposed financing said. The FHFA also worries Freddie's involvement would deepen the government's role in the nation's real-estate economy.

Banks want to keep Freddie out of the financing market, and have told the FHFA that they can provide ample loans to investors. Bankers say an FHFA decision to sideline Freddie could drive investors toward their loans and other services, generating fees.

Freddie's financing proposal is targeted to more established players with property management experience, not to investors looking to buy several foreclosed homes. Above, a foreclosed home for sale in Bridgeport, Conn.

"If [Freddie] came along and offered funding, and it was on better terms, in all likelihood, the funding business would end up in their hands," says Steve Abrahams, a mortgage analyst at Deutsche Bank . "The odds of it crowding out private participation are pretty high."

Tensions over the initiative underline the conflicts within a housing market still recovering from its worst crisis in decades, with Freddie and its larger sibling, Fannie Mae, banks and investors pulling in different directions. In addition, policy makers say they want to shrink the mortgage giants' role, but some economists have argued that any short-term steps the firms take to stimulate housing demand could make it easier to accomplish that long-term goal.

Freddie's financing proposal is targeted to more established players with property management experience, not to investors looking to buy several foreclosed homes.

Investors have raised billions of dollars in equity to buy homes to then rent out. But debt, often a cheaper alternative, has remained scarce.

By financing these purchases, Freddie could boost demand for foreclosed homes, investors say. Rising home prices would lift profits at Fannie and Freddie, which are selling tens of thousands of foreclosed homes every quarter.

Buyer's Market

Investors have raised billions, and are seeking billions more, to buy foreclosed homes and rent them out.

"Financing from Freddie would be the greatest economic stimulus," says Aaron Edelheit, chief executive of American Home Real Estate Co., which owns more than 1,500 houses and is actively buying more. "You'd have the greatest land grab you've ever seen."

Freddie officials began work on a financing program early this year, seeking the advice of major real-estate firms and banks. Officials settled on a short-term loan program for investors buying foreclosed homes and a longer-term facility that would allow some to build up their inventory, according to people familiar with the plan.

This summer, Freddie's pilot program won the support of the Treasury Department, people familiar with the matter said. Some Treasury officials had favored increasing the size of the facility, the people said. A Treasury spokesman declined to comment.

In a statement, a Freddie spokeswoman said the company is exploring a financing program that "would provide important liquidity" to the single-family rental market. Any program "will need further internal analysis and approval by FHFA to determine if and when it can be brought to market."

Meg Burns, a top FHFA policy director, told attendees at a single-family rental conference in May that she was concerned any financing by Freddie would "crowd out" private capital, according to conference attendees.

In July, the FHFA said the proposal couldn't move forward for the time being, according to people familiar with the matter. The agency said it wanted to study whether financing from Freddie would discourage banks from lending since the mortgage company's loans were likely to be less expensive for investors, those people said. The agency didn't provide a time frame.

Edward DeMarco, the agency's acting director, declined to elaborate. "Where it is in the process, what is going to affect the final determination--I just think it is premature for me to be talking about it," he said.

Home prices have picked up in recent months amid declines in the number of foreclosed homes that are hitting the market. Some economists say that a bigger hurdle facing would-be investors is the scarce supply of for-sale properties rather than the lack of financing.

More banks have begun looking into offering rental financing. In one recent deal, Waypoint Real Estate Group LLC borrowed $65 million from Citigroup. The Oakland, Calif.-based investor is working with the bank on a bigger, longer-term financing deal.

But loans to a handful of major firms doesn't mean the debt market is taking off, some investors and analysts say. "We've had a housing crisis in America since 2006," says Shekar Narasimhan, a former real-estate lending executive who now runs a consulting firm. "Has the banking system stepped in and said, 'We want to do this'? Not really."

To read the online article, please click here.

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