Fortress Investment Group LLC (FIG) and Deutsche Bank AG (DB), whose executives played roles in the housing bubble, are among the hundreds of firms that responded to a U.S. government request for proposals to rent out foreclosed homes.
The Federal Housing Finance Agency asked for ideas as Fannie Mae (FNMA) and Freddie Mac (FMCC), the mortgage companies seized by the government in 2008, seek to reduce losses, stabilize neighborhoods and support housing values by turning into rentals a portion of the more than 180,000 repossessed homes in their inventory. The submissions were due by Sept. 15.
Carrington Holding Co., Barclays Capital Inc., Neuberger Berman Group LLC, Ranieri Partners LLC and UBS AG (UBSN) also were among the financial and investment companies that responded to the FHFA, according to a list of 439 proposals. The agency released the names in response to a Freedom of Information Act request filed by Bloomberg News.
“We’re obviously big proponents of this program,” Rick Sharga, executive vice president of Carrington, said in a telephone interview from his office in Santa Ana, California. “We think it meets a market need.”
Demand for rentals is rising as more homeowners lose their properties to foreclosure and fewer buyers qualify for mortgages. About 6 million homes with a current market value of $750 billion will be repossessed by banks or sold at distressed prices by 2016, according to Oliver Chang, a San Francisco-based analyst at Morgan Stanley. FHFA’s plans for a foreclosure-to-rental program are significant because Fannie Mae and Freddie Mac service more than half of U.S. home mortgages, he said.
‘Most Important’ Program
“In our opinion, this is the most important housing-related program under consideration,” Chang wrote in a Dec. 6 note to investors. “The hope is that a larger unified program is established that could move the needle a year or two down the road.”
The FHFA won’t discuss specific submissions or give a firm timeline for structuring its program, said Corinne Russell, a spokeswoman for the Washington-based regulatory agency.
“FHFA is proceeding prudently but with a sense of urgency to lay the groundwork for the development of good initial transactions in early 2012,” she said in an e-mail.
Home values are down 32 percent through October from their 2006 peak, according to an S&P/Case-Shiller index of 20 cities, the New York-based group said today. They probably will continue falling next year, with a recovery unlikely before 2013, according to property-data provider Zillow Inc. (Z)
Maintaining Foreclosed Homes
Fannie Mae, based in Washington, had 122,616 foreclosed homes on its books with a carrying value of $11 billion as of Sept. 30, costing $733 million to maintain in the third quarter, according to a Securities and Exchange Commission filing. Freddie Mac controlled 59,616 foreclosed homes that cost the McLean, Virginia-based company $221 million to operate and manage in the third quarter.
Carrington, a real estate and mortgage services company founded by hedge-fund manager Bruce Rose, is “actively raising” about $1 billion to purchase foreclosed homes that will be renovated and held as rentals, with or without the government program, said Sharga, who worked at foreclosure-tracking firm RealtyTrac Inc. before joining Carrington in September.
He said that Carrington’s submission outlined three options for turning foreclosures to rentals in bulk: selling directly to investors who agree to repair and hold the properties as rentals, hiring managers to oversee rentals to be sold at a later date, or structuring transactions so the government and investors share revenue from seized properties.
‘Split the Proceeds’
“At the end of a period, you’d sell the property and split the proceeds,” said Sharga, whose company collects mortgage payments and manages about 4,000 rental homes, including properties repossessed by Fannie Mae.
The FHFA received more than 4,000 submissions, about 10 percent of which were considered valid, according to a Nov. 30 agency statement. Among the proposals were joint-venture partnerships, sales, auctions and asset-disposition strategies similar to those used by the Federal Deposit Insurance Corp. as well as by the Resolution Trust Corp. after the savings-and-loan collapse of the early 1990s, the agency said.
Executives from some of the companies that submitted proposals to the FHFA held influential positions when the housing bubble burst.
Sued by SEC
Daniel Mudd, chief executive officer of Fortress, took a leave of absence from the New York-based asset management company after being sued Dec. 16 by the SEC over his role as CEO of Fannie Mae from 2005 to 2008. Fannie Mae and Freddie Mac have drawn more than $170 billion in aid from the Treasury Department since they were seized by the federal government in 2008.
Mudd and Richard Syron, Freddie Mac’s former CEO, were accused by the SEC of understating the subprime loans held by the firms by hundreds of billions of dollars. Mudd has said that the government and investors were aware of “every piece of material data about loans held by Fannie Mae.” Tom Green, Syron’s attorney at Sidley Austin LLP, said there “was no shortage of meaningful disclosures” by Freddie Mac.
Gordon Runte, a Fortress spokesman, didn’t respond to a request for comment on the firm’s FHFA submission. The company said in a Dec. 16 statement that the complaint against Mudd “does not relate to Fortress.”
Betting Against Market
Greg Lippmann, a Deutsche Bank trader, hosted the first meeting of investors and lawyers who devised contracts and financial instruments used to bet against the housing market. During the financial crisis of 2007 and 2008, Lippmann helped Deutsche Bank offset losses on mortgage investments with wagers against subprime debt that made $1.5 billion, according to an April report by a Senate panel.
Renee Calabro, a Deutsche Bank spokeswoman, declined to comment. LibreMax Capital LLC, a New York-based hedge fund where Lippmann is now chief investment officer, wasn’t on the FHFA’s list of submissions.
Representatives for Ranieri Partners, Neuberger Berman, Barclays and UBS all declined to comment on their FHFA proposals.
The agency provided five examples of submissions with the content, names and contact information redacted. That information was withheld to protect trade secrets and the privacy of people who submitted proposals, the agency said.
“Our program, when fully implemented, has the potential of having a significant impact on the stabilization of real estate values across the country,” according to one of the proposals. The plan has been endorsed “by financial institutions, staffers of U.S. Senators and Congressmen, and real estate related people across the country,” according to the letter.
Harvard Professor’s Recommendation
“My former Harvard Business School finance professor recommended I contact you,” wrote a self-described “former banker” in another proposal. “Officials from the Federal Reserve and HUD have favorably evaluated the following asset/loan disposition functionality & proposal for my client’s real-time, forward-looking analytics real estate asset/note transaction platform.”
No contracts will be awarded based on the submissions, which “will be used for planning and market research purposes only,” the FHFA said in its solicitation for proposals.
Amherst Securities Group LP, a New York-based mortgage broker-dealer, opted not to submit ideas to the FHFA because “we did not feel we would be adequately protected” from Freedom of Information Act requests, Laurie Goodman, senior managing director in charge of research for the firm, said in an e-mail.
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