Hedge Fund Home Buying Spree?

MIAMI – The packaging of homes into multimillion-dollar real estate bundles by Fannie Mae and Freddie Mac has made South Florida real estate prime for the picking – if you’ve got the cash.

That’s meant tough times for small-time investors and a heyday for hedge funds and other institutional investors scouting for deals.

“What’s happening is Florida mortgages of foreclosed properties that were financed through FHA, Fannie Mae and Freddie Mac are being bundled and sold to hedge funds,” real estate analyst and consultant Jack McCabe told Watchdog.org.

“The problem is that you have to be a very large entity to buy the properties,” McCabe said. “An individual like myself, or you, or anyone else, are never going to be able to qualify to buy these.”

McCabe believes the outsize role of the government, and of large investors, is creating imbalances in the real estate market, boosting property prices and rental rates and keeping homes out of the hands of individual owners.

Luis Valdeon, owner of The Miami Dade Foreclosure List, agreed.

“In four years, rentals went up 60 percent” in Miami, Valdeon said of an analysis he conducted using his data. Nationally, rental rates are forecasted to rise 4.6 percent this year, following a 4.1 percent bump last year, according to the National Association of Realtors.

Nationally, the number of single-family homes as a share of all rentals jumped from 30.8 percent to 33.5 percent between 2005 and 2010, the biggest registered increase among all types of rentals, according to a Fannie Mae analysis of census data.

The hedge funds that have McCabe worried recognize that they can buy large numbers of houses, all clustered in one geographical area, to make managing the properties a whole lot easier. They go directly to Fannie and Freddie’s departments handling distressed properties, and buy the bundles before properties go to auction, McCabe said.

Fannie Mae is the nation’s largest buyer of mortgages, with a portfolio worth $3.2 trillion in home loans, securities and other guarantees as of November 2012.

It’s hard to pinpoint the exact number of homes scooped up by institutional investors, or by hedge funds, Walter Maloney, spokesman for the National Association of Realtors, said.

That’s because they buy the properties using multiple companies’ names, said Peter Zalewski, real estate analyst and founder of Condo Vultures.

But there are some indicators, like the increase in sales outside the traditional listing services like MLS.com, Maloney said.

Hedge funds and investment funds purchased some 5,300 Florida homes last year that were in some stage of foreclosure, according to RealtyTrac numbers reported by the Palm Beach Post.

“They just have loads of money and are paying maximum dollars for the properties, then renting them out,” Don Cameron, a real estate investor who owns a South Florida franchise of We Buy Ugly Houses, told the Post. “Some people are really inflating the market right now.”

Another indicator that institutional investors have the upper hand: Some 30 percent of real estate transactions across the country between June 2011 and May 2012 were in cash. That figure was up from 10 percent a decade ago, according to a briefing by the Florida Realtors, citing a chief economist with the National Association of Realtors.

The New York-based Blackstone Group, an investment company with a hedge fund division and one of the big players in Florida real estate, did not respond to a request for an interview.

“Blackstone has created a national platform, Invitation Homes, to purchase distressed single-family homes and then refurbish, lease and maintain them in neighborhoods across the country,” the company’s website says.

McCabe says the funds have in some instances paid more than market value on properties. “I think they do it to manipulate the market and push the comparables for appraisals up.”

He also noted that these massive sales affect not only local housing prices, but also prices throughout the state.

An increase in housing prices is usually perceived as a good sign for the economy but could have detrimental effects long-term.

“Anytime you have a company or a group of companies that can affect values for all the citizens in an area, whether it’s a city, a state, or a country, that goes against our free-market principles,” McCabe said.

Meanwhile, the list of metropolitan areas with high foreclosure rates grows.

Foreclosures were up 80 percent in Tampa and up 35 percent in Miami in 2012 compared to 2011, according to RealtyTrac.

Watch the interview with Jack McCabe.

By Marianela Toledo

“This article first appeared on Franklin Center. Reproduced with permission”

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