The Mortgage Crisis Brings Unexpected Neighbors

The New York Times “As Program Moves Poor to Suburbs, Tensions Follow” and the New York Post “LOST SOVEREIGNITY,” tell stories of how sanguine homogeneous neighborhoods could be facing abrupt changes. Although each article takes a different angle, both articles point to increased renters in neighborhoods thought to be exclusively owner-occupied by people of the same economic class.

The Times reports that the government is giving Section 8 housing vouchers (covering two thirds of the rent) to move families from some of the worst Oakland, CA neighborhoods to pristine newly built large track homes in San Francisco’s east bay suburbs. The city cited is Antioch in Contra Costa County. The mortgage crisis has tempted stuck property owners to accept any tenant they can get. The Times provides details on the complaints from both sides, ranging from increased crime to discrimination and intimidation. The ACLU and the NAACP are now involved.

HUD has issued suburban relocation vouchers for 2.1M renter families, an increase of 50,000 between 2005 and 2007. I don’t want to dwell on the social issues, but the trend from owner-occupied to renter occupied will accelerate until housing prices drop to the level of the mid-1990s. Wages have stagnated and the operating costs of a single family home have risen sharply. Until desperate investors can sell their properties, anything goes. More than ever before, buyers must price in neighborhood risk into their offer price.

From desperate landlords to "Big Time Buying in Foreclosed Single Family Homes," the Post is reporting sovereign wealth funds want to buy single and multi-family bank owned [REO] homes. One unnamed fund is looking to invest $29B. Mortgage consultant Mark Hanson has offered $0.40 on the dollar to IndyMac (IMB) and Washington Mutual (WM) for REO in California. Both banks refused, and now he is ready to offer $0.50 to $0.60 on the dollar for California properties. Hanson has successfully negotiated $0.31 on the dollar for a nationwide $2B mixed package of homes.

Multiple sovereign wealth funds, including Abu Dhabi, are expected to announce their participation in the REO market shortly. Don’t be surprised if your gasoline payment is recycled into the rental house next door. The benefit to tenants is that they won’t be kicked out because the landlord faces foreclosure.

This provides a potential silver lining for the almost lost Impac Mortgage (IMH), being kept alive by UBS (UBS). Impac has started a subsidiary to manage REO for themselves and others. Impac is already providing services to allow tenants to remain in defaulted properties, so that the loan servicer can receive rent. The sovereign wealth funds could provide a great catalyst for growth.

Depending on how they’re managed and how well their properties are maintained, massive rental networks from the sovereign wealth funds can either help, or hurt neighborhoods. My inclination is that it won’t be positive. The worst-case scenario would be that the houses remain vacant while the funds wait for appreciation.

Disclosure: The author is long IMH, UBS and WM.

Comments

[neeb??:]

I guess if one has reached the point of no return (in a quite literal sense) then you do what you gotta do. The problem now is that I don't see a way out of that kind of situation. If one has tenants that are AT LEAST WILLING to maintain the property to a standard in that neighbourhood then by all means go at it BUT like you say it probably won't. Watch out for grow-ops and/or meth labs next.Some areas here in London, ON had precisely that happen to them because of No Doc type mortgages.

2008 Aug 11 09:02 AM

[morethanmee...:]

mortgage crisis? what mortgage crisis? oh, the wall street weasels who bundled unsecured paper as securities w/ AAAAAAAAAA-ratings and sold them to trusting souls? ETFs, ARS', ... the list of greed instruments is endless. But don't worry, the u.s. taxpayer wants wall street to succeed so much (that's what paulson said, but he may have been talking in his sleep...) that a little up-tick or two in the incremental tax rate will hardly be noticed. i particularly laugh at some of the green funds who EPS look like the new york times...this is the next big scam on the street. perhaps they will track these funds in the "Gorex"...as i've said in other posts, you really have to marvel at the perverse beauty of these guys hiding in plain sight...

2008 Aug 11 10:51 AM

[notsosmart:]

many years ago a place called "lefrak city" in queens,ny, was ruined quickly because the courts forced them to rent their large 3 bedroom apts to the welfare crowd.i was one of the first people in this developement.it went downhill very quickly.i got out & moved toct.this is what will happen to these neighborhoods & since they were bought so cheaply,no owner occupied,dubai or abu dhabi wont care.i feel sorry for the middleclass,decent folks who still live there.

2008 Aug 11 04:41 PM

[Kunst:]

WE ship $700B a year out of the country. Sooner or later, that all has to come back here to buy stuff. Maybe treasuries for a while, but in the long run, we are selling America's productive capacity -- businesses, land, and why not, housing. We can all become employees of foreign owners and rent our houses from them too.

2008 Aug 11 11:42 PM

[Mainah:]

We Win the Battle but loose the War!!!!

2008 Aug 12 04:30 PM

[David666:]

Dude, it's "tract homes" (and "duct tape").

2008 Aug 26 07:42 AM