FDIC, FHA, Fannie and Freddie Real Estate Exposure Killing Home Values in Georgia

The FDIC held a big auction this week of properties they own outside of Atlanta Ga. JP King conducted the auction. The FDIC put up 187 properties for sale. The results have not been released yet. I suspect that it might be an interesting story when the numbers do come out. I reviewed some of the available information and came up with some observations.

• Of the 187 properties listed by the FDIC 18 were located in Hampton, Ga. Zip 30228.
• FHA (Federal Housing Administration/HUD) is currently listing 32 properties in zip 30228.
• Freddie Mac (FRE) has only 2 listings in 30228.
• Fannie Mae (FNM) has 25 properties for sale in 30228.
• The total number of homes that the government has foreclosed and has for sale in Hampton Ga. is 78.
• The FDIC is auctioning off the following home at 148 Makenna Drive; while at the same time FHA is trying to off-load the same model at 202 Makenna. Note that the FHA notice suggests a Sale Pending at $84,000. I will bet that the auction price for the FDIC is far less than the price FHA got for its house. Therefore the FHA deal is going to crater.

• It is fairly clear from this that one part of the government, FDIC, is killing the REO owned by other parts of the government. That is insane. No one appears to be looking at the Federal REO problem and attempting to make sense of it.
• The 'For Sale' signs by the Feds are all over the poor town of Hampton, Ga. What does this do to the people who live there and own homes? For them Uncle Sam is driving down local RE prices. What are those folks going to do when the price of their home drops as a result of the liquidations by the Washington crowd? They are going to default on their mortgages too. We know that the biggest source of default in the current cycle is that borrowers are so far underwater they have no economic incentive to pay. So they don’t.
• Hampton Ga. is a troubled community. It was overbuilt with fast money. What is particularly troubling for me is that FHA has a 40% share of the government owned properties in this community. That is a very big number. At the time these bad loans were made the FHA had a 10% total US market share. Therefore the REO ownership is about 4X’s higher than one would expect. Possibly the FHA just got unlucky with it’s exposure to Hampton. But if one extrapolated from this it would be easy to conclude that FHA has a very troubled mortgage book.

HUD’s head Shaun Donovan has said that the FHA does not need a bailout. Their exposure in Hampton Ga. makes that a question mark.

Comments

[Dave Wrixon:]

There is no market in the US that the Federal Government is not attempting to manipulate in one form or another. Their scope for maneuver with making the scale of the problem obvious to all is diminishing by the day. Once that happen the Housing Market, Dow, Treasuries and Dollar will collapse in unison

Nov 01 03:33 AM

[BRUCE E. W.:]

While I think it is vital that the open market interests keep a criticizing eye on Government in action, it is also important to recognize that these current real estate contradictions viewed from these GSEs are not "driving" property values down as much as "riding" them down. The property auctions should stay basically within traditional procedures if only to be certain that they are impartial and not parcel to some insider network of exploitation. The FDIC has a tendency to offload its liabilities with a least effort attitude which they tend to call the lesser of two evils.This is called a false dilemma since it proposes two options, both of which are unacceptable. When they are selling entire banks to private equity syndicates for pennies on the dollar they have a protocol of eating losses as the "least costly" over time. This is the same default loaded fallicy revisited with a difference only in degree. It seems you have hit on a similar example (which we can not afford) in the real estate markets. If I am correct in this assessment, than open complaints should be screamed from those roof tops being devalued. One would think that there would be plenty of damaged interests if this were to be a common practice, but it would also be (I believe) a great disservice to the public trust (ultimate their values being destroyed by complacency if not outright incompetence).

I noted an earlier article you wrote :seekingalpha.com/arti...
suggesting something of a public offering process to flip asset holdings. I don't like the idea of the public absorbing the costs while permitting a few well placed individuals to come in and clear out potential profits, but I think the basic idea of sort of "junk bonding" the total assets valued to public shares might be an interesting way of resolving the problem. If all properties were pooled as one major equity unit or regional portfolio, it could be securitized by a true value assessment and perhaps brokered at both ends of real estate sales and stock in the venture of displacing the debt jointly with maximizing the gains on each property (REOs).
I would like to know your opinion on if you think this is feasible as a potential resolve. It would strengthen the GSEs in the process which would only enhance the entire process and generate an up tick to property values if it were instituted nationally. It would also give the average investor an opportunity to invest in the overall recovery process (afterall they have already paid for the failures) and perhaps build some equity into their own retirement accounts (while helping rebuild the country to boot)! It would also distribute the ongoing risk and perhaps see these real estate forclosures entering back into communities at fair market values (since there would be watchdog interests at stake).

Nov 01 07:17 AM

[User 432509:]

The answer would then be??? Captain obvious, what would you do to make things better and why have you been keeping it a secret.. Don't you know we all have been waiting for you "The Shell Answer Man" to show up and lead us out of the darkness and into the light.

I for one am glad you are here and can not wait to hear what you would do.. and please.. Don't bore me with "Nothing the markets would have worked themselves out..." and where were you when Bush was shipping $12,000,000,000,000 a month of newly printed monies to a Country with 100 years in Oil reserves? Let me guess.. Bush was mis-understood for what he has truly achieved, history will in deed vindicate his genius? I guess what I am really saying is.. dont you have a church group to go pray for the end of America (and the world of course) with.. or a Palin 2012 bumper sticker to put on your car?

I would explain the lobby to you but I think you are much happier the way you are.


On Nov 01 03:33 AM Dave Wrixon wrote:

> There is no market in the US that the Federal Government is not attempting
> to manipulate in one form or another. Their scope for maneuver with
> making the scale of the problem obvious to all is diminishing by
> the day. Once that happen the Housing Market, Dow, Treasuries and
> Dollar will collapse in unison

Nov 01 08:34 AM

[marathonman:]

Unfortunately there are many Hampton Ga's across the country.

Nov 01 08:56 AM

[Bruce Krasting:]

The idea of pooling the REO and then creating a security is interesting. I think there are problems in this approach. The first is who sets the values on all of this? The GSEs? they think their entire book is money good, So there is a valuation problem.

Most comments on this piece suggest that the FDIC is doing the right thing by moving aggressively. I am not so sure about that.

My suggestion has been a swap of GSE Pref stock for REO. This is a junk for junk swap. But it would resolve the Pref problem and address a significant part of the REO problem.


On Nov 01 07:17 AM BRUCE E. W. wrote:

> While I think it is vital that the open market interests keep a criticizing
> eye on Government in action, it is also important to recognize that
> these current real estate contradictions viewed from these GSEs are
> not "driving" property values down as much as "riding" them down.
> The property auctions should stay basically within traditional procedures
> if only to be certain that they are impartial and not parcel to some
> insider network of exploitation. The FDIC has a tendency to offload
> its liabilities with a least effort attitude which they tend to call
> the lesser of two evils.This is called a false dilemma since it proposes
> two options, both of which are unacceptable. When they are selling
> entire banks to private equity syndicates for pennies on the dollar
> they have a protocol of eating losses as the "least costly" over
> time. This is the same default loaded fallicy revisited with a difference
> only in degree. It seems you have hit on a similar example (which
> we can not afford) in the real estate markets. If I am correct in
> this assessment, than open complaints should be screamed from those
> roof tops being devalued. One would think that there would be plenty
> of damaged interests if this were to be a common practice, but it
> would also be (I believe) a great disservice to the public trust
> (ultimate their values being destroyed by complacency if not outright
> incompetence).
>
> I noted an earlier article you wrote :seekingalpha.com/arti...
> something of a public offering process to flip asset holdings. I
> don't like the idea of the public absorbing the costs while permitting
> a few well placed individuals to come in and clear out potential
> profits, but I think the basic idea of sort of "junk bonding" the
> total assets valued to public shares might be an interesting way
> of resolving the problem. If all properties were pooled as one major
> equity unit or regional portfolio, it could be securitized by a true
> value assessment and perhaps brokered at both ends of real estate
> sales and stock in the venture of displacing the debt jointly with
> maximizing the gains on each property (REOs).
> I would like to know your opinion on if you think this is feasible
> as a potential resolve. It would strengthen the GSEs in the process
> which would only enhance the entire process and generate an up tick
> to property values if it were instituted nationally. It would also
> give the average investor an opportunity to invest in the overall
> recovery process (afterall they have already paid for the failures)
> and perhaps build some equity into their own retirement accounts
> (while helping rebuild the country to boot)! It would also distribute
> the ongoing risk and perhaps see these real estate forclosures entering
> back into communities at fair market values (since there would be
> watchdog interests at stake).

Nov 01 09:28 AM

[the gerald:]

is it possible that the Hampton GA holding is just too small and too far away to muck with?

there is question as to how to go about maximizing these sales of small value. time may cost more than sale price lost.

how many bodies for how long can be assigned to enhance the sales of the 78 houses by say 10 grand.(780,000)?

Nov 01 09:56 AM

[jimmy46:]

We know that the biggest source of default in the current cycle is that borrowers are so far underwater they have no economic incentive to pay. So they don’t.""""

That's like saying those people who had stock losses last March should have sold at the bottom of the market.
RE will rebound, just like stocks have, and those that hang on will be glad they did.

Anyone who defaults now won't be able to buy another house for at least 10 years.
What kind of idiot wants to put himself in that position?

Nov 01 01:21 PM

[Bruce Krasting:]

When stocks were at the lows there were sellers. That is how it got there. While some were taking losses and others were leaving ex big profits on the table all of them had real skin in the game. The people who own houses that are 30% underwater have no skin left. It is a completely different issue.

If one does a short sale or a deed in lieu transaction (walks on the property) they will have a six month blemish. They will also (maybe) still have some money in the bank. The ten year horizon you point to is too far. 2-3 years is more likely.

RE will recover some day. I don't see any upside for some years yet. Too much damage has been done. The Feds are 95% of the new mortgage market. That can not last for long. It will destroy us. When they step back there will be a shortage of mortgage credit. It does not add up to a win to me.

You also have the issue of demographics. Lots of boomers downsizing for the next decade or so.

I have a piece coming out tomorrow about the GSEs that touches on this. Thanks for reading.
bk


On Nov 01 01:21 PM jimmy46 wrote:

> We know that the biggest source of default in the current cycle is
> that borrowers are so far underwater they have no economic incentive
> to pay. So they don’t.""""
>
> That's like saying those people who had stock losses last March should
> have sold at the bottom of the market.
> RE will rebound, just like stocks have, and those that hang on will
> be glad they did.
>
> Anyone who defaults now won't be able to buy another house for at
> least 10 years.
> What kind of idiot wants to put himself in that position?

Nov 01 04:30 PM

[Bruce Krasting:]

Hampton is about 50+ minutes from Atlanta. It is also a place for summer homes. There is a NASCAR facility nearby. People who wrote me tell me it is a nice place. In the scheme of things it is not that significant. But if the Feds start doing this across the country it will be a big deal.

The average mortgage is 200k. Assume the INCREMENTAL cost of dumping these into the market is $10,000. There is a minimum of 4MM of these. I think it is much bigger. My guess is it is 8mm.

That is $80 billion. We could use that money. It is 10% of the deficit.


On Nov 01 09:56 AM the gerald wrote:

> is it possible that the Hampton GA holding is just too small and
> too far away to muck with?
>
> there is question as to how to go about maximizing these sales of
> small value. time may cost more than sale price lost.
>
> how many bodies for how long can be assigned to enhance the sales
> of the 78 houses by say 10 grand.(780,000)?

Nov 01 04:43 PM

[Smalltownba...:]

As a Georgia Banker I can tell you that the failures noted here had nothing to do with the government. They are left to clean up the mess. Yes the values of the remaining homes suffer but FHA does not restrict the use of FHA financing to a certain percentage of the homes in a neighborhood. This development was built in the outer and more distant suburbs of Atlanta. The failures began to occur when gas prices crept over $3 per gallon the first time.

While Atlanta's growth has not been geographically restricted it has over the last few years changed based on commute costs. There are other factors but Hampton is just one example. All suburbs at this distance from Atlanta's center have suffered. I know because I worked for a bank that failed in one of those areas.

In the future we must be smarter about how we development, how we plan our land use, where we build our homes and certainly how we finance them. Each entitiy mentioned in your article may be a government agency but the Federal Agencies behind each do not communicate regarding collateral disposition and never will. They can scarcely keep up with their own inventory today.

You are searching for a solution that will never be found.

Nov 02 09:02 AM

[a fat panda:]

">I for one am glad you are here and can not wait to hear what you would do and
> please" & "You are searching for a solution that will never be found.", & all of the
> others...."

Here is the answer : Innovate. I have been on this all day because of the constant drone of : "Oh help us the woe of the world is too much" . I don't know whether it is something in the water, but we are starting to sound too much like Scarlet O'hara.

The biggest problem that we face today is that we are locking up capital in the hands of people who don't innovate. They have a REO, which they are more than willing to hold because the taxpayer is footing the float. We are literally paying them to preserve the mistakes of the past. To these people, the only way to sell real estate is lower the price.

You asked for an example : Here is an example of changing the approach. It isn't going to fix the whole problem, but it is an example of innovation which will cause resources to be better spent.

seekingalpha.com/insta...


On Nov 01 08:34 AM User 432509 wrote:

> The answer would then be??? Captain obvious, what would you do to
> make things better and why have you been keeping it a secret.. Don't
> you know we all have been waiting for you "The Shell Answer Man"
> to show up and lead us out of the darkness and into the light.<br/>
>
> I for one am glad you are here and can not wait to hear what you
> would do.. and please.. Don't bore me with "Nothing the markets would
> have worked themselves out..." and where were you when Bush was shipping
> $12,000,000,000,000 a month of newly printed monies to a Country
> with 100 years in Oil reserves? Let me guess.. Bush was mis-understood
> for what he has truly achieved, history will in deed vindicate his
> genius? I guess what I am really saying is.. dont you have a church
> group to go pray for the end of America (and the world of course)
> with.. or a Palin 2012 bumper sticker to put on your car?
>
> I would explain the lobby to you but I think you are much happier
> the way you are.

Nov 07 01:10 AM

[J_W:]

Interesting reading about the inordinate concentration of foreclosures in Hampton, GA. Just a few weeks ago I was attending a conference in my industry at a hotel near the Cumberland Galleria in Atlanta.

Next door in another conference room was a real estate auction going on of foreclosed properties in GA. I walked over and listened in for a while and they were going through them by region and I did notice several properties in a row from Hampton. I thought at the time that was somewhat unusual because I knew it was a small town since I had never heard of it and I didn't see that much representation in the program from other small towns in GA.

Later I overheard two people talking and discussing an older man and his son that were buying up all the houses in Hampton. Then one of them offered the fact that it was Truett Cathy, who is the founder of Chik-Fila and local billionaire. I wondered at the time what his interest in Hampton was or maybe he sat there all day and bought them up all over the state?

Nov 15 09:26 PM