Is there gold in foreclosed homes?

NEW YORK – 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 US$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., Starwood Capital, Och-Ziff Capital Management and bond fund manager TCW, say people familiar with the fast-growing market.

The Federal Housing Finance Agency, which regulates Fannie and Freddie Mac, expects it will receive a considerable number of bids in April for the initial round of 2,500 Fannie-owned homes in cities like Atlanta, Chicago, Los Angeles and Phoenix.

One of the most bullish investors is Carrington Capital Management, which has teamed up with Los Angeles-based OakTree Capital. They have created a US$450-million fund to buy foreclosed homes in bulk and rent them out.

Laus, the Las Vegas housing entrepreneur, says there could be a “potential backlash” if some of the buyers are subsidiaries of the big banks that got bailed out by the federal government.

But many more public policy experts say the bulk sales by the government are worth trying, given the huge stockpile of foreclosed homes controlled by Fannie and Freddie.

“We have a shortage of rental housing already and I think this is a win-win situation,” says Kenneth Rosen, chairman of Rosen Consulting Group, which advises on urban planning and real estate management.

In February, Rosen co-authored a report with mortgage-backed securities guru Lewis Ranieri, which advocated the need for a private sector solution to the foreclosure crisis. A Ranieri-backed hedge fund, Selene Finance, has been investing in distressed mortgages for the past few years and is now eyeing foreclosed homes.

“I don’t think the money to do this is the problem,” says Rosen. “It’s the execution.”