We Know How Well Fannie and Freddie Managed the Housing Market. Their New Venture? Rehab-to-Rent as a Joint Venture with Community Organizations.

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Will Obama vocalize something of this nature before the election?  Seems the ideology of the far-left Progressive “think tank” seeps into Obama mind……Is Obama marching to the orders of the Center for American Progress?

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Joint Ventures Will Strengthen Rehab-to-Rent Housing Pilot

Involvement of Community Organizations Will Deliver Positive Benefits

June 25, 2012

By Alon Cohen

The Federal Housing Finance Agency and mortgage finance giant Fannie Mae are set to conclude the auction of nearly 2,500 previously foreclosed homes (known as “real-estate-owned” properties) in Fannie’s inventory to entities that have committed to rent them out for a number of years. The call for bids is over and the results will be announced shortly.

The purpose of the pilot is to assess the viability of various aspects of the Rehab-to-Rent program, from pricing to sale to operation of the properties themselves. For a detailed discussion of Rehab-to-Rent, see our January 2012 paper, “Rehab-to-Rent Can Help Hard-Hit Communities and Our Economy.As early advocates of converting foreclosed homes into affordable rentals, the Center for American Progress has been monitoring the pilot closely. At the top of our wish list for the pilot program is to include strong features that enable nonprofit community organizations to participate—most prominently via the use of joint ventures. These joint ventures would enable Fannie Mae and participating community organizations to share the risk and reward of rehabilitating and renting these properties.

Although rising property prices and tight capital make it hard for community organizations to buy foreclosed properties from Fannie Mae, their participation in this pilot and in the full Rehab-to-Rent program could have several positive effects for Fannie Mae as well as for the communities in which the properties are located. For Fannie, entering into joint ventures with community organizations may generate higher returns than with private buyers, as we detail below.

Rehab-to-Rent is also intended to increase the supply of rentals to help avoid a rental bubble, which is important to community organizations dedicated to boosting the supply of affordable housing. This can increase worker mobility by providing affordable options for those looking to move for a new job as well as increase household creation, which shrank to nearly zero during the Great Recession of 2007 to 2009, as younger Americans find housing options that finally permit them to set out and begin their own careers. (For more, see our paper).

The price of foreclosed homes sold individually at auction, however, is going up faster than expected. Without bulk property transfers like this pilot program, higher auction prices will mean that buyers will both expect to charge higher rents and will have to do so to cover their increased costs, perpetuating rising rents across the country. It also increases the chances that private buyers will not see sufficient returns to maintain a viable business, putting the quality of the resulting rentals at risk. This is why community organizations are so important to the pilot program.

How a joint venture works in Rehab-to-Rent

The classic joint venture model involves two parties: the equity (or “money”) partner and the operational partner. Here is a basic version of how it would operate in the Rehab-to-Rent pilot program. Fannie would contribute properties or a substantial portion of the equity in those properties. The joint venture partner would rehabilitate and retrofit the properties and then manage them on an ongoing basis. Fannie would receive a portion of the monthly rent as a fixed income stream and then receive a substantial portion of the eventual sale price of the property.

There are many variations on this structure. Terms could guarantee Fannie a return of equity or minimum monthly income stream, or the terms could offer the operational partner the chance to buy out the property from Fannie at a set price after the holding period. Importantly, the terms of joint ventures in the program permit community organizations such as nonprofit organizations to participate in bulk sales because they do not need to raise all the capital necessary to buy the homes. Instead, they just need access to a smaller pool of funds needed to rehabilitate and operate the properties.

But with less risk comes less reward. The operations partner has to share the rental income stream and generally has a small stake in an eventual sale because it has no equity in the property This generally makes joint ventures less attractive to private investors, but not so for community organizations and nonprofits whose required returns are lower. Table 1 offers a comparison of estimated bulk sales and joint ventures:

The estimates above are generous in several respects. First of all, a 20 percent discount is likely small. It is taken from the most recent discounts in the Federal Housing Administration’s so-called Section 601 distressed note sales, a benchmark. Discounts in earlier sales were significantly larger because the process was unknown and perceived to be riskier. The discount determines Fannie’s net loss in a sale; it correlates to losses one-to-one.

Sales in this pilot program also assume a “cash on cash” sale—that is, the value of the home assigned by Fannie to the home today will be the sale price after a five-year hold period. If the home value instead goes up, Fannie gains more in a joint venture; it gets nothing in a bulk sale because it holds no interest going forward.

Then there is the discount rate, which is used to determine the net present value of the foreclosed home. This rate is the federal discount rate available to Fannie, which is not that much higher than the cost of capital for private investors.

In short, the joint venture results in higher returns to Fannie but lower returns to the joint-venture partner—a fact that community organizations can easily stomach. It also requires less capital on behalf of the “buyer” to get involved—another plus for entities that cannot compete with the cash reserves of financial entities rushing into this space.

Secondary benefits of joint ventures: Still a sale, but with some control

Joint ventures offer an additional benefit to Fannie Mae: They may be considered as sales. Practically, the Federal Housing Finance Agency’s role is to wind down Fannie Mae and Freddie Mac, making any transaction in which Fannie retains an interest in the underlying properties less palatable. In a joint venture, Fannie and its operations partner create a joint venture—a separate entity—and transfer the properties to that entity. Fannie is swapping its interest in the houses for a minority interest in the entity.

The Federal Housing Administration did this in its Section 601 distressed note sales. This Department of Housing and Urban Development program permits the Federal Housing Administration to dispose of delinquent loans of the Federal Housing Administration by auctioning them into private-public joint ventures. Put simply, the agency determined that if it held a minority interest and did not control the assets in the resulting joint venture entity, it could consider the transfer a sale. Similarly, Fannie would not control the underlying assets except to set and monitor quality standards. It too may be able to consider these transfers a sale.

Even though the joint venture could be a sale for accounting purposes, it may still afford Fannie the “long tail” interest it needs to monitor whether landlords are holding up their end of the bargain. In an outright sale, Fannie would retain no interest in the properties, so its only recourse for a buyer’s noncompliance, such as failing to maintain habitable properties or to hold the underlying properties for rent, would be based on contract law. That is, Fannie would have to sue—a prospect that would take between months and years. If the property were sold to a third party in the meantime, it would only complicate matters.

A joint venture can be structured to require the approval of Fannie prior to the sale of any underlying properties within the Rehab-to-Rent program’s minimum holding period. That can prevent or more quickly nullify an impermissible sale.

For repeat offenders, the joint venture could even permit Fannie an option to take control of some or all of the joint venture’s assets.

Keep reading here…….

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WHO else should be scrutinized about the taxpayer mortgage giants Fannie Mae and Freddie Mac?

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Franklin Raines – Obama’s Campaign Economic Adviser
Franklin Raines

Born in 1949, Franklin Delano Raines (FDR – we’re not joking) served as Bill Clinton’s White House Budget Director. Raines was former chairman of Fannie Mae and drove the institution into the virtual ground after taking $90 million from it and departing while the investigation into irregularities was just underway. In addition, he gets a pension of over $100,000 per month. That’s per month, not per year.

Civil charges were filed against Raines. He was able to settle the lawsuit for a paltry $3 million.

The connection between Obama and Raines was reported in the Washington Post. However, Obama never disputed their relationship, until it was mentioned in a McCain political ad. Then, Obama tried to distance himself from Raines. However, Obama received thousands of dollars in campaign donations from Fannie Mae that made him the second highest recipient of such questionable donations. Just follow the money.

Franklin Raines also received a far below market value mortgage loan from the now defunct Countrywide Financial company.

LINK

Is Frank Raines receiving an “Executive Pension” and “Qualified Benefits” Plan?

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Remember this from 2009? Obama’s “Christmas Gift” to America.  Important Read at link below..

Blank-Check Bailout for Fannie and Freddie Means Taxpayers Get a Lump of Coal from Obama

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No crisis at Fannie Mae:  As a senior member of the House Financial Services Committee, Rep. Maxine Waters played a key role in allowing Fannie Mae and Freddie Mac’s reckless actions that led to the housing meltdown.  Here is Waters, at a 2004 congressional hearing, (and yes, that is the same “Frank” Raines that vastly overstated Fannie Mae’s earnings in order to receive $90 million in bonuses).  “We do not have a crisis at Freddie Mac, and particularly Fannie Mae, under the outstanding leadership of Frank Raines.”

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Trouble viewing video?  Click Here.

Nov 29, 2011

Democrats in their own words, covering up the Fannie Mae, Freddie Mac scam that caused our economic crisis.

Watch as the scandal ridden Maxine Waters, who is next in line to be ranking member of the House Finance Committee, defends the organization that almost brought down the entire US economy.

Of course, the whole thing was George Bush’s fault.

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COMMUNITY REINVESTMENT ACT

The original Act was passed by the 95th United States Congress and signed into law by President Jimmy Carter on October 12, 1977 (Pub.L. 95-12812 U.S.C. ch.30).[38] Several legislative and regulatory revisions have since been enacted.

The CRA was passed as a result of national pressure to address the deteriorating conditions of American cities—particularly lower-income and minority neighborhoods.[4] Community activists, such as Gale Cincotta of National People’s Action in Chicago, had led the national fight to pass, and later to enforce the Act.[39]

The CRA followed similar laws passed to reduce discrimination in the credit and housing markets including the Fair Housing Act of 1968, the Equal Credit Opportunity Act of 1974 and the Home Mortgage Disclosure Act of 1975 (HMDA). The Fair Housing Act and the Equal Credit Opportunity Act prohibit discrimination on the basis of race, sex, or other personal characteristics. The Home Mortgage Disclosure Act requires that financial institutions publicly disclose mortgage lending and application data. In contrast with those acts, the CRA seeks to ensure the provision of credit to all parts of a community, regardless of the relative wealth or poverty of a neighborhood.[40][41]

Before the Act was passed, there were severe shortages of credit available to low- and moderate-income neighborhoods. In their 1961 report, the U.S. Commission on Civil Rights found that African-American borrowers were often required to make higher downpayments and adopt faster repayment schedules. The commission also documented blanket refusals to lend in particular areas (redlining).[42] The “redlining” of certain neighborhoods originated with the Federal Housing Administration (FHA) in the 1930s. The “residential security maps” created by the Home Owners’ Loan Corporation (HOLC) for the FHA were used by private and public entities for years afterwards to withhold mortgage capital from neighborhoods that were deemed “unsafe”.[43]Contributory factors in the shortage of direct lending in low- and moderate-income communities were a limited secondary market for mortgages, informational problems to do with the lack of credit evaluations for lower-income borrowers, and lack of coordination among credit agencies.[44][40][41]

In Congressional debate on the Act, critics charged that the law would create unnecessary regulatory burdens. Partly in response to these concerns, Congress included little prescriptive detail and simply directs the banking regulatory agencies to ensure that banks and savings associations serve the credit needs of their local communities in a safe and sound manner.[4][40] Community groups only slowly organized to take advantage of their right under the Act to complain about law enforcement of the regulations.[45]

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Burning Down The House: What Caused Our Economic Crisis?

Trouble viewing video?  Click Here.

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RELATED LINKS:

Obama’s New “Sugar Daddy”? Warren Buffett Stands to Profit Handsomely from Mortgage Settlements

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Scoring of Fannie Mae’s ‘Rehab-to-Rent’ Pilots Gets Better

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Tom Donilon, Obama Security National Security Advisor Receives Taxpayer Salary As Advisor and “Executive Pension” from Fannie Mae

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So Fannie and Freddie want to “rid” themselves of foreclosed government home mortgages in the “auction” of these homes to be turned into rental housing.

Through a “contract” the auction bidders and winners would be under the scrutiny of Fannie and Freddie.

Even though the joint venture could be a sale for accounting purposes, it may still afford Fannie the “long tail” interest it needs to monitor whether landlords are holding up their end of the bargain.

A joint venture can be structured to require the approval of Fannie prior to the sale of any underlying properties within the Rehab-to-Rent program’s minimum holding period. That can prevent or more quickly nullify an impermissible sale.

For repeat offenders, the joint venture could even permit Fannie an option to take control of some or all of the joint venture’s assets.

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WHO in their right mind would want to go into a joint venture with Fannie and Freddie over foreclosed homes when they will allow you to bid and get these homes, but they remain “landlord kings” over these properties?

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