A story in the Chicago Tribune, dated March 20 2012, poses an interesting question in regards to the housing market and the potential of private investors in helping along the recovery. The story opens by referencing a former employee of a New York-based private equity firm who left his company in order to start a real estate business. Dan Madger has begun purchasing foreclosed homes at reduced prices and making them available on the rental market.

According to the Tribune story, there are “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.”

Interestingly enough, Fannie Mae owns about 200,000 foreclosed homes. That’s a number equal to about 25% of the total number, with the other 75% being owned by a variety of banks around the country. Apparently the federal government has decided it needs to get those homes off its books and back into the private sector. So they are actually courting private investors who will take advantage of rock-bottom prices in order to snap them up.

Critics are furious because they see the government plan as nothing more than rewarding investors who they believe were part and parcel with the housing bust. The Federal Housing Finance Agency disagrees.

“This is really a test and we don’t know what the results will be,” said the FHFA’s Meg Burns. “But the beauty of this pilot is we are going out with properties that are largely rented already, so people know what the cash flows look like and we know it is far preferable to have people living in the homes rather than the properties sitting vacant.“

Every Purchase a Good Purchase

We’ve been hearing from both the government and fair housing advocates that we need to make foreclosed houses available to the buying public in order to help the housing industry rebound. That sounds reasonable enough. As a matter of fact, several states have begun enacting regulatory change for that very reason. Last month the state of Florida, for example, took up a bill that would streamline foreclosure procedures in order to speed up the process so vacant homes could be put back on the market.

Following that logic then, it would seem that every purchase is a good purchase — even if the one buying out foreclosed homes is a private equity investor. It simply makes no sense to vilify such individuals by complaining that they’ll be making profits through their investment. Such investment is what drives business; it is what will drive the housing market back to stability.

Truth be known, the rental market is hot right now because the weakened economy means fewer people can actually afford mortgages. That’s not necessarily a bad thing. If nothing else, the housing bust dropped the market back down to where it should have been all along, with people who cannot afford to own a home renting instead. If Fannie Mae’s pilot program is successful in selling all 200,000 homes owned by the government, it will provide a great boost to the housing market overall.

There’s no reason why this pilot program should not succeed unless someone high up in the Obama administration or Congress decides otherwise. Let’s hope that doesn’t happen. The more foreclosed houses the industry can put back in the hands of private ownership the better off we’ll all be in the months and years ahead.