How Fannie Enriches Private Equity Investors at Taxpayer and Homeowner Expense

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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