Addison Wiggin

In my investment letter, Addison Wiggin’s Apogee Advisory, we spend a great deal of time, money and resources looking for new investment ideas that our subscribers can act on independently. Sometimes what we find instead is outrage.

For example, the federal government is about to dump millions of the foreclosed homes at fire-sale prices to hedge funds and private-equity firms with government connections. If you’re an individual investor who might like to get in on the action, forget it! You’re shut out of this deal.

Homeowners who might be interested in buying the foreclosure property next door? Out of luck. And retirees hoping for a return on their money more than 1.8% on a five-year CD find another avenue closed off.

Prior to the calamity of 2008, we might have thought the deal we’re profiling today unthinkable. But now we’re becoming as immune to new instances of blatant cronyism as American babies are to diphtheria.

If you’ve got the hammer for it, we may as well get down to brass tacks: As many as 10,000 properties might be unloaded in a single transaction during the first quarter of 2012 — thanks to a government program so new it doesn’t have a catchy name yet, only the working title “Enterprise/FHA REO Asset Disposition.”

Roger Arnold, chief economist for Pasadena, Calif.-based ALM Advisors, has a different name for it — “the largest transfer of wealth from the public to the private sector.”

As of last September, there were about 800,000 “real estate owned” or REO homes in the United States — homes repossessed and on the market. Close to one-third of these — 250,000 — sit on the books of Fannie Mae, Freddie Mac and the Federal Housing Administration. That is, 250,000 homes are owned by you and me, the US taxpayers.

But that number is about to explode: According to Ken Harney at the real estate industry publication Inman News, “The three agencies face a tsunami-sized shadow inventory that is now heading their way — a combined 1.4 million delinquent loans on their books, at least half of which, they estimate, will end up in foreclosure.”

So now we’re talking that 250,000 number suddenly ballooning to nearly a million. The early-warning waves of the tsunami started lapping at the shore in November, when foreclosure auctions reached a nine-month high. The final numbers might end up even higher: Late-stage delinquencies tallied by Lender Processing Services in January approach 2 million.

Thus, the hypothetical excuse for the fire sale: “Even with heroic efforts,” Harney says, “Fannie, Freddie and FHA won’t be able to handle that level of REO volume using their current systems of individual sales, directed at owner-occupants and small investors.”

Thus, “You and I will not be allowed to participate,” says Roger Arnold of the newprogram. “These [new] investors will come from the private-equity and fund community, Goldman Sachs and its derivatives, as well as foreign sovereign wealth funds that can bring a billion dollars or more to each transaction.

“The US taxpayer will get pennies on the dollar for these homes, and then be allowed to rent them back at market rates.”

The groundwork is being laid right now. During the first week of January, the Federal Reserve issued a white paper on housing: “A government-facilitated REO-to-rental program,” it said, “has the potential to help the housing market and improve loss recoveries on REO portfolios.” Three Fed governors put the word out in speeches the same week.

The big boys can smell the money and they are lining up to play.

Among the players that expect to profit big from this government-sponsored scam are the private firms that already manage properties for the government. The Department of Housing and Urban Development calls them “management and marketing contractors.” Their principal owners and officers tend to consist of former high-ranking officials with HUD, the Treasury, FHA and so on.

There are 20 of these “M&M” firms, according to a list on HUD’s website. On the theory that perhaps you could reclaim some of your tax dollars by investing in these firms — the same theory with which we suggested ITA, the defense and aerospace ETF — we examined whether any of them are publicly traded. None are. Sorry.

No, the only way you’ll be able to make any money off these insider deals will come long after the feast is over and you’re allowed a few crumbs. “Once the privatization has occurred,” one analyst observes, “and the properties are generating rental income for the investors, the initial investors will cash out by forming real estate investment trusts (REITs), real estate operating companies (REOCs) or limited partnerships that will be made available to retail investors.”

Alas, by then, the easy money will have been made…at your expense. Feels pretty good, doesn’t it?

That’s why, increasingly we find ourselves casting our gaze overseas, longing for returns in foreign lands in places where the governments are somewhat less corrupt and the playing field slopes somewhat less directly toward the pockets of crony-capitalists.


Addison Wiggin,
for The Daily Reckoning

Addison Wiggin

Addison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He's the creator and editorial director of Agora Financial's daily 5 Min. Forecast and editorial director of The Daily Reckoning. Wiggin is the founder of Agora Entertainment, executive producer and co-writer of I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival, the 2009 Critics Choice Award for Best Documentary Feature, and was also shortlisted for a 2009 Academy Award. He is the author of the companion book of the film I.O.U.S.A.and his second edition of The Demise of the Dollar, and Why it's Even Better for Your Investments was just fully revised and updated. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times Magazine, The Economist, Worth, The New York Times, The Washington Post as well as major network news programs. He also co-authored international bestsellers Financial Reckoning Day and Empire of Debt with Bill Bonner.

  • gman

    “The big boys can smell the money and they are lining up to play.”

    and you’re not one of them. that’s all.

  • JohnGalt’s friend

    The wolves are in charge of fleecing the flock now. These days it’s so tough being a sheep.

  • name withheld upon request

    This article is a retread of an article from 8/18/11. I really don’t see any new information here. See–but-not-for-you.html

    Odd that the author came upon this in February 2012 while searching for “new” investment ideas.

  • buster douglas

    gman you are such a defeatist

  • margo

    Would like to share some of your articles with some people. Want to get them fired up so maybe they will contact their so-called reps,

  • gman

    “gman you are such a defeatist”

    don’t shoot the messenger. everyone is playing with debt dollars, trying to get other people to pay their debts for them and to make their living off of the work of others. they are defeated before they start.

  • The Investors Upside Down Mortgage


    Wolves have always been in charge of fleecing the flock.

    Maybe you meant to say the sheepdogs, eh?

  • main wallet

    Cronyism that includes former federal officials…

    Why does this sound very much like Russia just after the fall of the USSR???

  • John Galt’s Banker Buddy

    It’s always a great time to be a one percenter.

  • CommonCents

    It is called “Potterville” in my book!

  • paddyoperry

    Gee, does such a less corrupt place exist?

  • James E. Sparling

    Perhaps the greatest offender in the Federal Government is Diane Feinstein. She and her husband are the largest shareholders of CBRICHARDELLIS, the largest real estate firm in the nation. Her self-dealing with Federal properties and insider trading are legendary. (see EXCLUSIVE: Senator’s husband’s firm cashes in on crisis – Washington Times) Any normal citizen would be in prison for this transaction alone.

  • Barnum

    ok … i got it
    1. create a fairy loan that goes bad
    2. sell at full value to US gov/agency cashed up with public debt
    3. agency sells to mates – big funds
    4. mates get loans from same originator banks who get some form of US bailout funds
    5 New funds buy fire sale stock
    6. bundle again and resell as retail
    7. book 50-500% profit
    7a. how many suckers atre there out in the world …?

  • Moneypit’s empty

    Shouldn’t this be titled, “Obama’s Fire Sale”?

    A bank loans $100k on a house selling for $500k. The economy crashes (oops) and now the market value is $200k and the mortgagee is so far underwater he walks away. The bank now owns a $200k property for a $100k outlay, less mortgage payments and interest received. Gee, sounds almost like a conspiracy.

  • GeorgeW

    So, in real life, Bailey Park IS going to become Potter’s Field. Bummer.

  • GeorgeW

    The ubber rich already own essentially everything, and their mindset is growth. But how to grow? I couldn’t figure that out. Even taking the entire anemic GDP growth is not sufficient to satisfy them (but it is a good start). You have given me the answer. Grabbing an incredible bargain will cheer them up.

    But as for the rest of us, we are going to hell in a handbasket. And perhaps we have already arrived; like you’d expect from someone in a handbasket in hell, I keep getting hotter and hotter.

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