Wednesday, December 05, 2007

Reaction to the podcast, from one who knows....

From a reader/listener, regarding the podcast:

Excellent podcast this week....Thought you'd like this story:

After Katrina, FEMA decided to help those displaced with free housing. FEMA went to the Veteran's Administration (VA) for help. The VA had a plethora of homes available, as they guarantee the VA loans. When the veterans default on their mortgages, the VA ends up with them. FEMA and the VA came to an agreement. Essentially, the VA would supply the Katrina victims with the best homes available in Texas, as the VA and FEMA did not want the negative press of supplying the bad homes to victims. In return, the VA would charge a little money to compensate for the opportunity cost of not selling those homes on the open market. They decided on $400 a month. The victims would sign 1-year leases for the homes at $400 per month, FEMA would give the victims $400 per month, and the VA would get the homes back when the leases terminated.

So, the victims, who were living in glorified boxes in New Orleans, were now fighting with each other over "who got the homes with Jacuzzis." Because they were guaranteed a beautiful home (for free), they were very picky over what was acceptable. The incentives were also there for for arbitrage. Multiple families decided to live in a single home, since it was still a much better life than what they were used to in new Orleans, and they rented out "their" nice homes for $1,200 a month. This was lower than the market price for a nice home in Texas, which allowed them to be picky as to retners. The victims cared very little about the quality of the renters. So, the renters ended up being the kind of people not very well liked in nice communities with home owners associations....but they paid cash. Of course, the homes were completed trashed when they came back to the VA.

So, let's think about it. I'll commend the victims for their entrepreneurial savvy, but who are the victims?

-The neighbors in the HOA.
-The taxpayers for guaranteeing the loans, but not having the "ability" to sell inventory on the market
-The other people trying to rent property in Texas that had to compete with $1,200 a month leases
-FEMA recognized the problem, but couldn't do anything about it for fear of "attacking" hurricane victims

So, FEMA decided to try to avoid this problem. When the leases expired, the victims naturally asked for extensions. FEMA decided to put trailers on the land in New Orleans, instead. Then, formaldehyde was found in the trailers, and the victims are suing the federal government. FEMA's response? They called the VA to get the victims back in the best homes again. This was 2 weeks ago.

I'm an asset manager for a company that is subcontracted to sell the VA's foreclosed homes. That's how I know this story. You can also add me to the list of victims above, as my job is to fix up and sell the homes on the market. The VA ordered the best homes be given up for the cause. Those homes were the most likely to sell quickly, and they were (in many cases) the ones we asset managers invested the most time, energy, and money fixing up.

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