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Michael Olenick: How Fannie Enriches Private Equity Investors at Taxpayer and Homeowner Expense

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By Michael Olenick, creator of NASTIACO, a crowd sourced foreclosure document review system (still in alpha). You can follow him on Twitter at @michael_olenick or read his blog, Seeing Through Data

Corporate welfare queen Fannie Mae has decided to spread their taxpayer provided love, doling out taxpayer subsidized sweetheart deals to a small number of lucky real-estate investors.

Let’s examine one of those deals, Fannie Mae’s SFR 2012-1, which includes three groups of properties in Florida.

Fannie Mae sold 699 Florida properties, appraised at $81.5 million, for $12.3 million cash to San Diego based Pacifica Companies. In exchange, Pacifica must rent the homes, paying Fannie another $78.1 million from rental proceeds, but during that time Pacifica is allowed to keep a 20-percent management fee plus 10-percent of rental proceeds.

If that doesn’t sound like money for nothing, like the song goes, Fannie sweetened it by adding a trigger allowing Pacifica to keep 50-70 percent of rental proceeds, depending upon performance, after Fannie’s been “paid” (read: collected rent) amounting to $49.3 million.

Finally, adding insult and injury – to the American taxpayer and the former homeowner – Pacifica can eventually sell the houses and keep the proceeds or use them to pay off the expected rental income stream faster.

I like to dislike the companies on the receiving end of these deals but, after doing what I’ll admit is minimal research on Pacifica, they seem lucky, not evil. Pacifica is a rags-to-riches Father/sons operation which built a large property business in California; they know how to snatch up a good deal when they see it. Despite operating in California during the bubble-era they survived, and even thrived, the housing bust. These guys are smart investors: a lot smarter than the Fannie executives they were dealing with.

Pacifica buys many types of properties, and has for a long time, including industrial, retail, hospitality, multifamily, single tenant, and sale leaseback. Those latter two categories appear to have mated to spawn a new category, foreclosed leaseback, that is at the heart of this deal.

Let’s dive into the numbers. Pacifica purchased three blocks of properties in different regions of Florida, 699 properties total. Repeating myself, the properties appraised for $81.5 million and were sold to Pacifica for $78.1 million, a 4.2% discount, not so bad for Fannie. Pacifica will be paid 20% of the monthly rents as a management fee, plus 10% of the monthly rents for their “ownership,” while Fannie will be paid the remainder to pay for the properties. Once Pacifica has paid off $49.31 million they will be allowed to keep 50% or 70% of the monthly rental income, plus the management fees, paying the rest to Fannie until the house is paid off. Pacifica’s cost of capital – the interest Fannie charges – appears to be zero, which is very bad for Fannie. Accountants might even argue that the management fee plus rental income constitutes a negative interest rate, paying Pacifica to accept free capital.

Fannie did not disclose the individual property addresses but they’re not that hard to find using public records. Twenty of the properties are in my own Palm Beach County, FL. Three of those properties are in the same development, Waterside Luxury Townhomes, a series of non-descript low-rise buildings. Based on photos from one of the properties, a vacant 598 Green Springs Place, these condos literally redefine the meaning of the luxury. I’ve never considered placing a toilet in the laundry room, inches from the washing machine, thus allowing a person to relieve themselves and clean their clothes simultaneously. I suppose that the rich, living in luxury, are smarter than the rest of us.

This townhome was sold to a couple on Dec. 18, 2006 for $265,900. They financed 100% of their 1,318 sq. ft. palace using two loans, a first for $212,720 and a second for $53,180, both issued by Fannie Mae “Strategic Partner” Countrywide Home Loans. The foreclosure was filed Jan. 2, 2009, almost exactly two years later, a couple weeks after two assignments were inked and filed. Those assignments were executed by well-known robosigner Patricia Arango, signing as “Assistant Secretary” of MERS for Financial Lending Group, Attorney-In-Fact for Countrywide, and attorney in law for the Law Offices of Marshall C. Watson. That busy woman apparently works three jobs.

By Sept. 15, 2010 the $212,720 loan mushroomed into a $263,184.53 Judgment against the couple. Title transferred April 18, 2011 to the Federal National Mortgage Association, Fannie’s more formal name, who purchased the luxury condo for $10.
Fannie quickly flipped the property to legal entity SFR 2012 1 Florida, LLC, which public records indicated is owned by somebody named “Mae, Fannie.” BAC Home Loans Servicing, LLP – that’s Bank of America for those not in the know – filed a quit claim deed writing off the second mortgage on Sept. 22, 2012. Finally, on Sept. 27, 2012, it was transferred to Pacifica’s SFR 2012 1 Florida, LLC.

The Palm Beach County property appraiser estimates that the is worth $47,000 in 2012, up from $45,000 in 2010 but down from $265,900 in 2006, an 83% decline. Zillow lists the property as a foreclosure for sale, with a listing price of $63,500.

Discounting the purchase by 4.2%, the overall discount, Pacifica paid $60,883. Using the overall terms of the deal they paid $9,124 cash, 15-percent of the discounted value, and essentially financing the remaining $51,708 at zero-interest.
If the property fetches Zillow’s rental estimate of $1,134/mo. Pacifica will be paid $340.20 a month, the $226.80 (20%) management fee, plus their rental stream income of $113.40 (10%), and Fannie will be paid $793.80/mo. After a few years the income to Pacifica will increase to $793.80, $567 from rent and the $226.80 management fee. After a few more years Pacifica will own the condo outright when they can sell it to recoup – assuming the value does not decline – another $65,000 or so.

Let’s look at another alternative Fannie apparently did not consider. If Fannie reduced principal to fair market value then refinanced the house at 4% interest on a five-year mortgage, and BOA wrote off the worthless second, , the borrowers would have a $1,169.45/mo. payment. Fannie would have recovered $70,166.95 in about the same timeframe leaving the borrowers owning their condo outright.

Federal law mandates that the FHFA force the agencies to minimize losses while promoting affordable housing. Somehow enabling a couple to own their own home in five years, for the price of rent – while recovering more overall money for Fannie – doesn’t meet the goal. However, enriching investors on the other side of the country does.

Before we rant and rave that FHFA Director Ed DeMarco’s gotta’ go let’s remember that it’s Evil Overlord Geithner who enabled and even encouraged this type of nonsense, using DeMarco to deflect attention. I have issues with DeMarco’s decisions but the Administration, meaning Geithner, is on the same page as far as preferring to “clear the market,” meaning sell properties with a built in profit to investors, to doing deep principal mods to viable investors (don’t listen to the official noise on this front; there’s been no serious action to move this forward).

There’s a strong argument that the competing goals of HERA, minimizing loss while promoting affordable housing, are impossible. But doing the opposite, increasing losses while discouraging affordable housing, is even harder, yet Fannie has done that. Paraphrasing something a Senatorial candidate I adored once said, there are no blue states, and there are no red states, there are only screwed states, and that includes all of us together.

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30 comments

  1. diptherio

    “…after doing what I’ll admit is minimal research on Pacifica, they seem lucky, not evil.”

    Now, now, Michael…let’s not be jumping to conclusions.

    Nice article, thanks for all the research.

  2. Esohbe

    The article clearly shows where the rent income is going, but it doesn’t show any allowance for expenses. Where is an allowance for condo association fees, special assessments, paint, after occupancy clean up, landlord paid utilities etc. Over time I would think that these items will easily approach 30% of the gross rent and when you get a bad tenant these costs can quickly eat up a years rent.
    Fannies entry into the rental world is short sighted.

  3. Mike M

    “If the property fetches Zillow’s rental estimate of $1,134/mo.”

    That’s not going to happen, you know. With the massive rental inventory on the market in Florida, who in their right mind is going to rent that place for 1100? Who can even afford to rent the place at 1100 in Florida’s labor market? Besides, 1100 would buy you a better place around the corner with a 3.5 down FHA loan, and cheaper monthly nut. So, just imagine the tenant who can’t afford to buy in such a place that one would have to settle for in such a market. Trouble, trouble, trouble…… hardly a profit machine.
    I’d redo your assumptions down to, maybe, 600, with frequent income disruptions as the transients move in and out of the place. That is probably the best case scenario. Nobody is going to get rich on trashy So. Florida rentals like this for a very long time. Look what’s happening in Vegas. Prices are still dropping, even after “investors” gobbled up a bunch of stuff last year expecting 10% on their money. Now they’re all in a race to the bottom lowering rents just to fill those apartments.

  4. Tyzao

    the toilet in the laundry room is more typical in Brazil, maybe Florida as well, it’s kinda like a half bath, without the half, bedroom tend to be smaller, maybe there is a second floor with a bar-b-que and patio — not so luxurious really

    but the read is interesting — good for Pacifica, I don’t fault them, but have to wonder how all this will turn out, so many details seem to be left out in these deals

    1. John F. Opie

      Hmmm…

      I posted links here, but they did not seem to make it in.

      Simple: google Pacifica, then check who runs the place, google their names + political contributions, and you will find that the principals of Pacifica have made contributions to the Democratic Party exclusively. At least one made contributions of $11,700 to the San Diego Democratic Party, and no one contributed anything to any other party.

      It’s really not that hard to figure out how lucky they are based on that.

      1. Veri

        Yes, that may be true. However, who is head of the FHFA? The government representative that oversees Fannie and Freddie? And what has been his role in the housing recovery?

        That would be Ed DeMarco, a Bush appointee. All deals go through him. Ed DeMarco’s primary responsibility is to preserve taxpayer assets and prevent foreclosures. He has failed to do so, stating that it would be a subsidy to homeowners. Instead, he advocates market-based solutions such as this one.

        It is clear that he has failed in his responsibilities. Remember, as Conservator of Fannie and Freddie, all deals go through him. A Bush idealogue, a free marketeer. In our society, it is now acceptable to gift banks and financial companies with trillions in guarantees and trillions in bail-outs. It is not acceptable to help homeowners.

        Hate to burst your bubble.

        1. John F. Opie

          Hate to disappoint you, but my bubble isn’t burst. DeMarco serves at the whim of the President, as he is only the acting Director, not the appointed one. Hence: if you are going to pass the blame upstream, that’s where the buck stops, to coin a phrase.

          And the further point is that this is a market solution (given that housing prices haven’t fallen nearly enough to clear the market) that has been corrupted. DeMarco is the Director of FHFA and makes policy (again, at the whim of the President, who can remove him at any time), but the implementation of the policy is with Fannie and Freddie.

          1. Yves Smith Post author

            You have really not been following the news. The Dem friendly sites and news orgs have been bashing DeMarco regularly, calling for him to be fired. Obama can’t. The best he can do is a recess appointment, the Republicans stymied his nomination of a replacement.

          2. John F. Opie

            Yves, I do follow the news. The only reason DeMarco hasn’t been replaced is that Obama doesn’t want to incur the political cost of doing so. Order him out, make a recess appointment, done. It would make the press/political operatives – but I repeat myself – ecstatic.

            According to 12 US Code sec 4512, the FHFA statute, the Director may only be removed for cause, as the FHFA is an independent agency. Malfeasance, misconduct, out he goes. Policy disagreement? Not considered cause.

            However, DeMarco is only the Acting Director, removed by the Presidential appointment of a Director. This can only be done by a proper Senate confirmation process or a recess appointment. As Obama has used recess appointments for filling the CFPB Director and appointments for the NLRB, neither of which would have gotten through the Senate at this point in time, he clearly knows that he can do this and can replace DeMarco at any point in time.

            President Obama designated DeMarco as Acting Director when James Lockhart left. He serves as Acting Director at the whim of President Obama.

            That President Obama has not appointed a new Director has, most likely, three reasons: a) political costs are too high; b) the White House lawyers are advising him not to do so for legal reasons (I am not a lawyer and do not profess to understand this) and c) DeMarco is a very useful scapegoat for those who want to yell and scream about something or someone.

            But that is different from saying that Obama can’t replace him. He can: he is just not willing to do so.

  5. Susan the other

    And how is Fannie handling the fact that no one owned a mortgage on the condo, no note exists, no allonge, no chain of title. You know, all the legal things? Does Geithner have an opinion on this?

  6. Richard Davet

    The “GSE Business Model” is nothing more than a “theft by deception scheme” with the taxpayers footing the bill.

    Geithner knows that it was the Congress who first gave an implied guarantee on the mbss which is now explicit. That is specifically why Dodd and Frank have exited the scene before they are tarred and feathered and held accountable for this brainless business model in which all players benefited financially.

  7. Haloeffect

    Michael – thank god we have people such as your organizations like yours to report on such things. It is still hard for me to imagine that prior to 2008 I would have had zero desire to attempt to analyze (correctly or incorrectly) a deal such as this.

    I see the cash payment of $12.1 million cash as the only real consideration put at risk by Pacifica. Do the terms of the deal require Pacifica to make a minimum payment to FMA for each month for any unit is not rented? Seems more likely to me that Pacifica may be getting a guaranteed 30% cash on levered up return for the ugly job of managing 699 rental properties in Florida while they are actually occupied. It’s hard for me to imagine a CA firm would do this job for anything less. The biggest real return Pacifica receive is that they will no doubt have their legal claims on each property protected since they “bought” these properties from Fannie Mae and “owe” FMA considerable monthly cash flows. FMA gets something even more valuable. They can report “serious progress in attacking a tough problem.”

    It is possible, even likely, that individual investors might offer much more cash for each property were they to get this same deal. The “deal” is loan payments being satisfied by 70% of actual rental proceeds. And I am assuming loan payments will only be made when there is rent to pay them. FMA’s deal nets them about $17K per property cash up front vs roughly. $115K appraised value. Is this the best they can do?

    1. Michael Olenick

      I don’t see any penalty provision if they fail to rent the units, though I’m guessing (hoping) they can’t collect the 20% management fee for a vacant unit, because 20% of nothing is nothing. If there’s no rental income they also can’t pay down the financing, so there is an incentive to keep the properties occupied. Remember that all the revenue is pooled together though so the ongoing costs of finding renters for the empties should be more than offset by the revenue from the others.

      Right now it looks like about 2/3rds are occupied and about 1/3rd, including the one in the example in the article, vacant. The example was listed as a for sale — move-in ready — so it doesn’t look like they do have to do any work other than finding a renter.

      It’d be hard to believe Fannie couldn’t find individual investors who would take a deal like this. Even if there is another catastrophic RE price collapse the total value will never fall below their out-of-pocket cost; they’d just take longer to pay off Fannie.

  8. Tom Lawler

    Michael: you’ve bad a tough year; bad forecasts; many slips in your data; pretty much missed every trend in 2012. I know you are new to housing data analysis; Not surprising that you went astray. Many of us in the housing industry have had tough years trying to forecast where things are going, and you’ve had a very horrible year.

    1. Michael Olenick

      I didn’t take market manipulation into account; an institution you know well artificially keeping properties off the market to stifle supply and pump up prices, reducing book losses. Then again, who would ever think that a GSE would resort to accounting fraud (oh yeah; I know somebody who might know a thing or two about that).

      After what I’ve dug up over the past few years shame on me for not calling out the “bottom” as BS earlier. Gimmicks like “selling” bulk properties with no financing costs eventually get called out, just like gimmicks like revenue recognition manipulation have been in the past.

      Let’s see what happens with home prices starting next Wednesday. A little bird (or maybe a few) have told me servicers are aggressively trying to shed their problem loans so maybe the floor will hold. Or maybe it won’t. Or maybe it will but smaller RE investors will find that their rent projections were off base and be forced to sell when faced with a liquidity crisis, causing another renewed round of sales.

      I know that I bought a house in Palm Beach County, FL, for cash, at the beginning of 2011. It had been sitting empty for four years. I fixed it, and I live in it, and the only reason I’d sell it is my wife doesn’t like two stories after all. I’d strongly prefer to sell it for more than I bought it for — to see your market floor prediction pan out — but if she really can’t stand the stairs I suspect I’ll end up with a loss. If either of us could make the call for sure we’d be billionaires though, wouldn’t we?

      1. Tom Lawler

        I didn’t take “market manipulation” into account. What drivel. And your “attack” on CalulatedRisk was a joke. But sorry you’ve been so wrong, didn’t see other “non market manipulation” trends that were obvious to others, and sorry your forecasts have been so horribly, terribly wrong.

        You love to say you are “data driven”; use your data to explain your horrible, terrible forecasts for this year.

  9. kareninca

    Tom, you are a pathetic shill, and your “articles” on Calculated Risk are shill articles for the housing industry. You are part of the corruption of the system, and it’s embarrassing to see your puny needling post here. People who want a sense of what is really going on in the housing industry read Dr. Housing Bubble, Michael O., Mark Hanson, Mish, and other commentators who are actually truth-seekers. You and CR should be ashamed of yourselves for the damaging spin you put on defective information, and you for your significant role in the housing mess. Anyone who takes your advice is toast, and you don’t even care that you’re ruining lives.

    BTW, weren’t you EMPLOYED by one of the organizations that Michael is investigating . . . .?????

    1. Michael Olenick

      Thank you! Yes, Tom was VP, or something like that (Tom, I’m sure you can tell us your title) of financial innovation at Fannie while they committed an $8 billion revenue recognition accounting fraud that’s still under investigation. Now it appears that they’re engaged in a loss recognition fraud — pumping up their housing has bottomed chorus — that’s eerily familiar. Tom is a “retired economist” who believes that the only people that can fix or analyze the US housing industry are those that broke it so severely the entire economy has been injured. I wish he and his cronies would take their ill-gotten gains and said off into the sunset. OK: I wish some of them would spend time in prison for the mess they left behind, though I’d settle for obscurity and never again being in a position to advise those they left in a world-of-hurt about how to fix their mess.

    2. backwardsevolution

      kareninca – Tom Lawler (I shuddered when I had to type the word “law” in his name) is just another son of a psychopath, of the same breed of scum that have throughout history added absolutely nothing to the world. Just another worthless parasite.

    3. Tom Lawler

      I do not post anything on CalculatedRisk. I write reports using data and analysis, and have given CR carte blanche ability to post any articles I write if it finds it useful.

      CR’s track record is so much better than Olenick’s, that Olenick looks like a person who used to “make badges” then somehow got into analyzing housing data but who didn’t have a clue on what he waws doing. That seems a fair assessment based on what has happened.

  10. chris

    Michel I have to say I agree with you on your assessment of housing. I am not convinced we have see the bottom here in Las Vegas and actually think we may see another drastic pull back after the market manipulation comes to an end. Las Vegas is fairly unique in its abundanc of underwater property but it looks like we could be headed for a problem. You can see more details on the upcoming Las Vegas meltdown in this article here.
    http://www.consideritsoldlasvegas.com/2012/10/another-real-estate-meltdown-for-las.html

  11. chris

    Sorry for the typo I meant to say Michael!!!

    I totally agree that we are in for a problem with housing, real estate companies are pushing short sales so hard here they have become 50% of all sales and the AB 284 law has curtailed foreclosures but has done nothing to curtail the amount of people defaulting and falling behind. There has been no effort to reduce principal or to clear some debt from the market by letting current homeowners benefit. It is a major transfer of wealth when we see bulk properties being sold while allowing buyers so much leverage. Would be nice to buy property using leverage these days and minimal down payment. A nice deal for the investors but will the little guy ever be able to get into the rental market again? The only way for the little guy to use leverage was real estate, now it is also being controlled by large government entities and huge corporations. The laws passed in Nevada have put use behind everyone it terms of clearing the market. 80% of home owners were underwater as of las November. HOw can that ever be fixed without principal reductions? I don’t think it can…….http://www.finanicalrealityrevisited.blogspot.com

  12. backwardsevolution

    Michael – absolutely great investigative work!!!!! Thank you for illuminating yet another giveaway in the United States of Hustle. I wish you well with your house.

  13. Chetan Shah

    The fallacy in the calculations perhaps lie between the two data points mentioned in the article:

    1) “Zillow lists the property as a foreclosure for sale, with a listing price of $63,500.”
    2) “If the property fetches Zillow’s rental estimate of $1,134/mo.”

    Could it be true that a property worth 63,500 fetch a monthly rental return of 1,134?

    According to me, noone will pay such high rentals (1.8% of value per month) if similar property was available in neighbourhood for 63500.
    - Chetan Shah

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