Please read and comment on the entries that follow.  The most current one will be highlighted on this page; earlier entries can be found under the archives link below.

Foreclosed homes - What to Do?

April 06, 2012

With millions of families displaced by foreclosure, and their homes often sitting vacant and vandalized while the torturous process of foreclosure grinds on, new ideas have emerged about how to make better use of this inventory, especially to provide afforable rental housing while preserving the homes and preventing further deterioration of neighborhood values and conditions.  Literally billions of dollars in new investor equity has been marshalled in anticipation of bulk property sales that could provide bargain-priced homes that could be repurposed to rentals and eventual sale when markets improve.  Locally, “mom and pop” investors are bidding for these homes, and new would-be property owners/investors are showing up on courthouse stairs to bid for these properties.

At the federal level, the Federal Housing Finance Agency (FHFA) is pushing Fannie Mae and Freddie Mac to experiment selling some of their REO in bulk to investors who would convert the properties to rentals.  

Bank of America recently announced its own “Lease for Deed” pilot to allow curernt delinquent homeowners to swap their ownership for a long-term lease.  The program could lead to these families having the opportunity in the future to buy back the homes, as well.  If the pilot shows promise, BofA says they will expand it.

I was recently a guest on KCRW’s To the Point broadcast, which you can listen to here.


Refis for Underwater Borrowers

February 10, 2012

WSAV4 TV in Savannah, GA interviewed me there while I was attending a Mercy Housing, Inc. board meeting on February 1, 2012, the day that President Obama announced the Administration's proposal to have FHA help underwater borrowers refinance their loans.


A New Consensus?

September 11, 2011

As Washington has sweltered under a record heat wave this spring and summer, another thaw of sorts has been taking place on Capitol Hill. After two years of intensely partisan and polarizing positioning around the future of Fannie Mae and Freddie Mac, two bi-partisan proposals have created a new front that could signal a more hopeful future for the debate.

The two bills are HR 2143 sponsored by California Republican Gary Miller and New York Democrat Carolyn McCarthy and HR 1859 sponsored by California Republican John Campbell and Michigan Democrat Gary Peters are very different in key respects.

While the bills take radically different paths to a new market paradigm, both start from the premise that the federal government should continue to play a key role in the nation's mortgage system. Both bills would authorize government support for mortgage securities. Both would create new entities to succeed the failed mortgage giants Fannie Mae and Freddie Mac. And both would charge a new fee to cover the cost of an explicit and limited guarantee of mortgage securities - not entities that issue them. These common elements establish a new anchor for the debates to come in the House and Senate over the future of the mortgage finance system.

Until now, the only comprehensive Republican-backed proposal for a post-GSE world has been Rep. Jeb Hensarling's HR 1182, which would wind down Fannie and Freddie and leave no enduring federal role in the conventional mortgage market. Other Republican members of the House Financial Services Committee have introduced a flurry of bills that each attacks a different aspect of the GSEs' conservatorship and collectively endorse a much more constrained federal role. Rep. Scott Garrett's Capital Markets subcommittee has held hearings and mark-ups of these bills, but the full Committee has yet to schedule time to consider them. Hensarling's bill, and the adamant opposition to any continuing federal support for mortgage finance that it symbolizes, has support from Republican freshman back benchers, and surely will claim vocal support once the full Committee begins considering options.

The Miller-McCarthy bill would establish a publicly owned and operated "credit facility" for securitizing loans for both ownership and rental housing. The entity would absorb the current operations of Fannie Mae and Freddie Mac; those companies would be wound down through the current conservatorship. The new facility would maintain a portfolio, principally for enabling the facility to be a countercyclical force in the market, to modify delinquent and defaulted loans it has guaranteed, and to carry out specialized multifamily rental housing finance. The new facility would be governed by an independent board, and regulated by the current GSE regulator, the Federal Housing Finance Agency (FHFA). Although owned and operated by the US government, the facility's workers would neither be government employees, nor subject to its normal workplace and compensation rules. The facility would charge two separate fees for its securities - one to provide a top level guarantee, much like Fannie and Freddie historically have done, and a second to finance a new insurance fund to provide a catastrophic back-up guarantee. As with Fannie and Freddie, loans with less than 20 percent borrower equity would have to have further credit support, either through private mortgage insurance or participation by the originating lender.

The Campbell-Peters bill would authorize the establishment of new, chartered mortgage guarantors backed by private capital to guarantee securities for both rental and ownership. These entities could be owned by any financial services entity, including through lender cooperatives. While the new entities could operate portfolios, they would do so without any federal support. Their securities, meanwhile, would enjoy a catastrophic guarantee that would be financed through a fee paid by consumers. While this guarantee would protect investors in the mortgage backed securities issued by the new entities in the event their own capital is exhausted by losses, it would extend no protection to the investors or bondholders of the new entities. The entities would be chartered and regulated by the FHFA, and like Miller-McCarthy, would require additional credit support for loans with less than 20 percent borrower equity.

Common Ground

The sponsors' common embrace of a federal role in supporting the housing finance market is important because much of the debate around mortgage finance reform has hinged exactly on this point. Free-marketeers and conservatives generally have argued against any continuing federal role in the markets outside of FHA. According to these advocates, government involvement in the housing market was a leading cause of the mortgage crisis. In this narrative, increasing levels of directly and implicitly subsidized federal involvement in the housing markets since the Great Depression led to the catastrophic run up in housing prices in the 2000's, the rise of subprime lending, inflated house prices and the credit bust of 2007-08. They argue that only when the private market is allowed to operate without government involvement will markets stabilize.

The other side of this polarized debate has argued that market and regulatory failures in the early 2000's led to an explosion of private label mortgage securities fueled by an unregulated "originate to sell" underwriting model that fueled a race to the bottom in standards as originators, lenders, securitizers and investors sought ever greater volumes of supposedly safe and high-yielding mortgage securities. In this model, Fannie's and Freddie's market dominance - and the underwriting standards that had long dominated the market - were outrun by the private securities market. Their singular focus on residential mortgages and their very thin capital requirements put them in extreme jeopardy when the market collapsed, and their peculiar private ownership model led them to try to follow the stampeding herd into riskier loans in order to regain market share lost to private label securities, leading to catastrophic losses and government takeover. This narrative concludes that while the private ownership/implicit federal guarantee model of the GSEs is not sustainable any longer, a more constrained and focused federal role remains critical to ensuring liquidity, stability, and access to affordable and sustainable mortgage credit.

It looked like the debate over housing finance reform would turn into a straight-up death match between these views. But the introduction of these two bills has changed that dynamic. Neither bill is ready for prime time; they are both more like conceptual sketches than working blueprints. Progressives will find fault with both of these proposals - neither makes a significant effort to assure these new entities serve all communities and households, avoid "creaming" the markets, or extend credit to otherwise underserved areas. Conservatives will oppose the bills' fundamental embrace of a federal role. But that agreement in the bills to a fundamental support for a government role and the use of an explicit federal guarantee that is priced and paid for means that the debate's center of gravity has shifted significantly away from the bipolar extremes of only a few months ago.

There is little prospect of either of these bills moving forward any time in the near future. And it's likely that a significant portion of senior committee leaders and restive back benchers will continue to push for the elimination of federal support in mortgage markets.

But Miller, McCarthy, Campbell and Peters have vowed to press for hearings on their bills, and to bring them up whenever GSE reform is discussed in the House Financial Services Committee. The fact that Republicans and Democrats are beginning to talk about the same fundamental premises and are collaborating together to design a new approach based on them is notable in its own right as a bright spot in an otherwise polarized landscape. It gives the Administration more room to maneuver as it readies Version 2.0 of its own proposals. It will shift the debate's middle ground further to the left than seemed likely only a few months ago.


Kicking Assets

August 19, 2011

The government last week launched a new “Request for Information (RFI)”  asking for suggestions about how to take Fannie Mae’s, Freddie Mac’s and FHA’s inventory of foreclosed homes and move it in bulk into the hands of private investors so they can convert them to rental units.

The solicitation states that it is seeking

“ideas for sales, joint ventures, or other strategies to augment and enhance Real Estate-Owned (REO) asset disposition programs of Fannie Mae and Freddie Mac (the Enterprises) and the Federal Housing Administration (FHA).... A specific goal is to solicit ideas from market participants that would maximize the economic value that may arise from pooling the single-family REO properties in specified geographic areas.”

I’m glad the Administration has reawakened its interest in the housing markets after two years of the weak showing of its flagship “Making Home Affordable” mortgage modification program.  Maybe the solicitation will generate proposals to optimize the GSEs’ management of their REO and use existing public investments in the firms to achieve long-term public benefits.  But it’s much more likely to elicit offers from private equity to buy properties in bulk at a steep discount to convert to rentals and ultimate resale. If this is the case, it seems to me the Administration would be deliberately throwing away an opportunity to turn the GSE lemons into at least a weak lemonade and missing the chance to use its stranglehold on Fannie Mae and Freddie Mac to do something useful.

What It Says

The RFI lists the following key objectives:

• reduce the REO portfolios of the Enterprises and FHA in a cost-effective manner; • reduce average loan loss severities to the Enterprises and FHA relative to individual distressed property sales; • address property repair and rehabilitation needs; • respond to economic and real estate conditions in specific geographies; • assist in neighborhood and home price stabilization efforts; and • suggest analytic approaches to determine the appropriate disposition strategy for individual properties, whether sale, rental, or, in certain instances, demolition. FHFA, Treasury and HUD anticipate respondents may best address these objectives through REO to rental structures, but respondents are encouraged to propose strategies they believe best accomplish the RFI’s objectives. Proposed strategies, transactions, and venture structures may also include: • programs for previous homeowners to rent properties or for current renters to become owners (“lease-to-own”); • strategies through which REO assets could be used to support markets with a strong demand for rental units and a substantial volume of REO; • a mechanism for private owners of REO inventory to eventually participate in the transactions; and • support for affordable housing.

Equity funds that have been busily raising capital in anticipation of swooping in on distressed assets have an obvious reason to want the government to give them Fannie’s and Freddie’s homes on the best terms. They’re hoping for a windfall when markets come back and these homes could be sold once more for a profit.  Renting them in the meantime while values and demand remain depressed would be a good strategy in many markets, although the challenges of adequately managing scattered, single family rental units is no small thing.  It would reduce vacancies and expand the supply of rentals at a time when they’re badly needed.  And real estate interests, state and local governments and communities themselves are terrified by the looming flood of foreclosed homes that is building up and depressing home sales and prices.  They likely would welcome any moves that would slow down the torrent.

But why should the government be so anxious to engineer the transfer of thousands of properties into private hands, when it could hold them itself through the GSEs, offer them for long-term rentals, protect communities from opportunists and profiteers, and keep that potential upside for itself?

America’s Best Landlords?

The problem with turning to the private sector to move these properties out of the GSEs’ hands is that these interests ultimately will want to generate sufficient profits to give their investors competitive returns.  This will mean one or a combination of outcomes:

• Once acquired, maintenance and upkeep on the properties will be held to a bare minimum to maximize the rate of return on rental income.  See “Slumlords, neighborhood deterioration” for further details. • Homes will be flipped as soon as possible to new investors who couldn’t bid for large numbers of units.  See above or below, repeat. • Investors offer smaller lots of homes to state or local governments, at a mark-up that secures their return, hiking the ultimate cost of the homes. • Homes are maintained and held until the market firms up, rents are set at the highest level possible, then the homes flipped to new owner-occupants, who will have to pay a high enough premium to generate equity-like returns for the investors.

A recent news story on mortgage fraud noted that “Fannie Mae continues to investigate REO flipping involving real estate agents who withhold competitive offers on REO properties so that they can control the acquisition and subsequent flip.”  In other words, private sector real estate interests already have found ways to scam the REO disposition process to enrich themselves.  Freddie Mac published an article on its Executives Perspectives Blog outlining its increased attention to fraud by real estate professionals in arranging short sales.

Fannie and Freddie are effectively owned by the US government.  They no longer have to worry about shareholders’ interests, or Wall Street’s assessment of the net profit potential of their programs.  In another time, progressives might have lobbied for the government to set up a dedicated entity to facilitate the clearance of excess real estate inventory and do the utmost possible to protect current homeowners and local markets.  But the government already has this solution to hand in Fannie Mae and Freddie Mac.  So why not use them for this purpose?

This would keep the properties occupied and generate some revenue.  This could be used to offset what they paid to redeem the mortgages from investors, and cover ongoing maintenance and management costs.  As markets stabilize, properties could be put into the for-sale market at a controlled pace with an absolute preference for new owner-occupant buyers, in many cases even the families then renting the homes.  Unlike private investors motivated by the need to generate the highest possible short-term return on investment, this approach would allow for more patient management of the rental assets and a focus on the social and community returns, as well as the financial ones.

It’s the Politics, Stupid

Nothing illustrates the quandary of Fannie and Freddie’s conservatorship more starkly than this paradox.  Politics in Washington means that the GSEs can’t be allowed to enter into any projects that could extend their lifetimes any longer than minimally necessary.  So there is a premium on solutions to the REO dilemma that move the assets off their books as quickly as possible.  Even if that means relinquishing the positive role that government could play by leveraging its patient capital to directly manage these assets in more creative and responsible ways.

Some respondents to the RFI may propose making better use of the GSEs themselves through direct management of the assets, or through some joint venture that would keep the assets at least nominally under public oversight.  But I suspect that most of them will focus on how to move the assets into private hands with the lowest cost and fewest strings.

Realistically, no matter what Congress decides to do with Fannie and Freddie over the next few years, there are going to be long-term legacy resolution issues like the REO problem that will have to be managed.  The government could reimagine conservatorship as a means to broker long-term stability in distressed markets by using taxpayers’ investments in the GSEs as patient capital deployed for public purposes rather than merely as a “bail out” to be unwound as quickly as possible.  Nothing would stop Congress from developing a new, long-term mortgage finance structure and barring Fannie and Freddie from doing any new business after a date certain.  But that need not preclude the continuing management of the legacy book, and particularly the troubled book and REO, by the companies through an extended conservatorship or through some other reorganization focused on the orderly unwinding of their assets and obligations.

It seems to me that the constraint is not economic or managerial.  It’s political.  In the current climate, that may be all it takes to see the government give up one more opportunity to do the obvious in favor of the short-term and potentially much more costly option of privatization.


MN Public Radio on foreclosures

July 12, 2011

UMinn law professor and former MN Assistant Attorney General and I discuss foreclosures in this call-in radio program.


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