Insight:The Wall Street gold rush in foreclosed homes

Thu Mar 22, 2012 4:04pm EDT
 
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By Matthew Goldstein and Jennifer Ablan

NEW YORK (Reuters) - Dan Magder recently gave up a top job with private equity firm Lone Star Funds to strike out on his own and become a landlord.

He's joining a growing list of big and small investors who see fat profits to be made in renting out foreclosed homes, especially now the U.S. government is moving ahead with a trial project to sell big pools of single-family homes that Fannie Mae currently owns in some of the hardest-hit housing markets.

Investors seeking higher yields are drawn to foreclosures because the rental market is red hot. But the heated competition for foreclosed homes is reminiscent of the frothy expectations that seem to accompany each new Wall Street investing craze.

Even proponents of buying foreclosed homes are advising caution about the kind of returns that investors can expect to reap and the potential negative headlines that can come with being a landlord.

Critics, meanwhile, contend the federal government is fostering a transfer of wealth of sorts by selling big pools of foreclosed homes to big fund investors and high-net-worth individuals. There's also concern that some of the players who helped create the housing crisis will now benefit by buying foreclosed homes at a steep discount.

Between them, Fannie and Freddie Mac own more than 200,000 foreclosed homes. The nation's banks own more than 600,000 single-family homes, according to RealtyTrac, a housing tracking service.

Housing experts expect the foreclosure machinery to crank up again now that regulators and banks have agreed to a $25 billion settlement to deal with earlier foreclosure abuses.

Some of the high-profile institutional investors who are committing money to buying foreclosed homes - or seriously considering jumping in - include private equity firm TPG Capital, investment firm Oaktree Capital Management, Warren Buffett's Berkshire Hathaway Inc.(BRKa.N: Quote), Starwood Capital, Och-Ziff Capital Management (OZM.N: Quote) and bond fund manager TCW, say people familiar with the fast-growing market.   Continued...

 
A boarded up home is pictured in California's Inland Empire, which comprises two counties, Riverside and San Bernardino in this photograph taken April 14, 2009. REUTERS/Dan Whitcomb