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.