Drum v Me re New Housing Idea

August 10th, 2011 at 11:20 pm

Kevin Drum likes the White House/FHFA idea to move Fan, Fred, and FHAs foreclosure stock onto the rental market much less than I do.  As he says, he just doesn’t get it.  Calls it downright “weird.”

So I’ll try a little harder to get him on board.

First, Kevin doesn’t get why you need this plan.  Can’t investors already buy bulk foreclosures from the gov’t entities and sell them, rent them, blow them up, etc.?

I don’t think that’s right.  There is no established mechanism for the agencies to sell in bulk and thus far the transactions have largely been one-off.  In fact, contrary to Kevin’s understanding that Fan and Fred aren’t selling much this way, I’m told they’re doing a fairly brisk business, with record sales last quarter.

But the problem is they’re dumping the properties on oversupplied residential markets.  Why don’t these investors see the folly of their ways and turn them into rentals?  Some are, but most aren’t…I don’t know why not, but the point is that more will do so if they have the incentive this program creates.

Basically, what’s new here is that the agencies want to treat these assets—their REO properties—in a different way to reduce their credit risk.  Remember, FHFA and FHA are insuring many more homes than they own through foreclosure, and to dump their foreclosure stock on the residential market risks driving down prices even further.

So they need an efficient way to clear the pipeline of their foreclosed stock more strategically than dumping one-offs on the residential side, and this idea should help them do so.

Kevin and I both raised the fire sale problem—the idea that by selling foreclosed properties to investors in bulk the taxpayer is getting a worse deal.  Like I said, maybe, but the return on these properties is already very low and if this program helps stabilize prices in hard-hit markets by keeping more of these properties off the market, that will be better for the agencies (recall the point above about their much larger insured stock), and thus the taxpayer, not to mention the economy, in the longer run.

Finally, we may own 80% of the GSEs (Fan/Fred), but they are overseen by the FHFA, an independent agency, and they don’t have to try this or any other idea if their regulator doesn’t want to do so.  I and others have called for more aggressive loan mods and principal write-downs, but this is the first semi-bold idea they’ve gone for.

To me, all of the above makes it a good idea worth a try.

 

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8 comments in reply to "Drum v Me re New Housing Idea"

  1. foosion says:

    >>to dump their foreclosure stock on the residential market risks driving down prices even further.>>

    Adding a lot of rental property increases the available housing stock. The effects would seem similar to dumping foreclosure stock.

    Why don’t investors buy foreclosed properties and rent?

    You say they don’t have the incentives this program creates. When I read that, my first thought is a giveaway for some middleman to do what the government or other investors could do directly, such as we’ve had with student loan programs.

    You also say both that there’s no established mechanism to buy in bulk and that there’s a brisk sales business. A lot of one-off transactions equals bulk. Is there any evidence a bulk buyer would be turned down, despite the absence of an established mechanism?

    >>I and others have called for more aggressive loan mods and principal write-downs>>

    That’s a much better idea. I find it hard to believe the FHFA won’t do the right thing if they’re pushed by the 80% stockholder.


  2. Kevin Rica says:

    I think that a lot of people underestimate the practical difficulties of just dumping the properties on the market. Certainly this is something that can be done and will be done. But it will take a lot of resource re-allocation and maybe some legislative work on tax codes and accounting standards to make it easier to do for some financial companies that are involuntarily holding large amounts of real estate.

    I’m sure that there are some semi-retired people and real estate agents who have been managing a half-dozen small properties and are now selectively picking up a half-dozen more. Some of them with the right financing and a couple of good partners in the renovation business are maybe now planning to go big.

    But the big real estate management firms that this task requires will take months and years to put together. It won’t happen overnight. It will happen though. So F&F need to put their properties out slowly at first.


  3. Q says:

    “But the problem is they’re dumping the properties on oversupplied residential markets. Why don’t these investors see the folly of their ways and turn them into rentals? Some are, but most aren’t…I don’t know why not, but the point is that more will do so if they have the incentive this program creates.”

    A hint: It’s the Servicers have different incentives from investors, an underwater home is worth more to them foreclosed.


  4. Martha Retallick says:

    Martha checking in from America’s sickest housing market, Tucson, Arizona.

    I’d like everyone to repeat after me: Housing Bubble.

    There. You said it.

    The housing bubble was THE reason why house prices went up so sharply from the late 1990s to 2005 or 2006. Prices did not increase because the personal incomes of Americans increased — they’ve been flat or declining since the 1970s. They did not increase because of spike in household formation. And you can also omit job growth, because after the late 1990s dotcom boom, that’s been pretty lackluster. Likewise, the rate of inflation — house prices generally track it. Inflation during this period was pretty moderate.

    So, now prices are falling back into line with historic metrics of incomes and rents. To repeat, the median house price in any market is 3X the median local income. And the purchase price of a rental property should be 100-120X the monthly rent that one can expect to collect. This is not the same as the rent that one thinks that he/she needs to cover the mortgage. Tenants don’t care about that. And neither does Mr. Rental Market Price.

    I fear that this latest effort will be like previous government efforts to prop up house prices (HAMP, I’m looking right at you). Meaning that it will be a very expensive failure.


    • Kevin Rica says:

      Good points Martha!

      In fact, the only true, big winners in the housing market were probably people like my parents who sold their house in 2004 and moved into assisted living or people who inherited their parents’ house and sold between 2004-2007.

      High housing prices are just one more form of inflation. The only true winners are people who own land suitable for development.

      If you bought a house in Palo Alto Ca for $35K in 1960, it may sell for $1.5 million today, but that is only enough to buy the same house that sold for $35 in 1960. Inflation.


  5. markg8 says:

    Checking in from Chicago which isn’t the country’s sickest housing market. As I wrote yesterday at Kevin’s blog: “This is a sound idea. In the Sunday Chi. Trib RE section there was a story about rising rents. With tightened mortgage criteria, high down payments and a shaky job market home and condo ownership is off most people’s radar, especially people in their 20s and 30s. This would lower the pressure on the rental market instead of ripping the bottom out of the already depressed home selling market. And for cryin out loud Kevin we’d have to put in place regulations with teeth in them to make sure the buyers do what they say they’re going to do. It’s not like there hasn’t been scandals involving the section 8 market, the general real estate market let alone Fannie and Freddie in recent history. Let’s turn ’em loose and turn a blind eye to what happens sounds like a very Republican plan. What could possibly go wrong?”


  6. Making it Easier to Transform Foreclosed Property into Rentals Could Save the Housing Market | Rise of the Center says:

    […] bulk sales of government-owned foreclosed homes, which is not currently standard practice, would be one incentive for investors. Providing bulk price discounts would likely be another. The government’s call […]


  7. Joseph Pearl says:

    I agree, it’s worth a shot. THanks for the post.

    Joseph S. Pearl, LL.M. – A Professional Law Corporation
    1400 Chester Ave., Suite C
    Bakersfield, CA 93301
    661-281-0253


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