Can the Foreclosure Crisis Be Solved?

Friday, September 30, 2011   /   by Justin Hoffmann

Can the Foreclosure Crisis Be Solved?

The nations foreclosure crisis is easy to identify, but solutions have so far eluded the best and brightest.

Still, past failures havent deterred new attempts to clear the glut of foreclosures weighing heavily on the balance sheets of both banks and the federal government. On Tuesday a Senate subcommittee met in Washington for a hearing to discuss and debate some these new ideas.

Granted, hours of congressional testimony dont usually provide fodder for blogs, but some ideas presented Tuesday are worth highlighting. The hearing was prompted, in part, by the Obama administration asking investors for ideas on how to turn thousands of foreclosed homes owned by the government into rentals. (Lots of investors are already clamoring for a way into the single-family rental market.)

Heres a quick rundown of ideas presented at Tuesdays hearing:

Allan Dechert, president of the New Jersey Association of Realtors, a trade group: The Realtors recommend that any foreclosure solution must focus on providing mortgage financing to buyers and investors. Mr. Dechert suggested repurposing funds from the Troubled Asset Relief Program to encourage more lenders to modify loans and agree to short sales, in which a bank allows a home to be sold for less than what it is owed by the borrower. On foreclosures, Mr. Dechert argued strongly against bulk sales of REO, or homes repossessed by lenders, or, in this case, the government-sponsored entities. Bulk sales will result in big losses for Fannie and Freddie, Mr. Dechert argued, and drive down home prices. Exclusively selling in bulk to large national investors at deep discounts will only work to further consolidate a large section of the housing market into the hands of a few market participants, Mr. Dechert said in his written testimony. Instead, the Realtors advocate a lease-to-own program that combines elements of REO-sale and rental-housing schemes.

Bob Nielsen, chairman of the National Association of Home Builders: Builders, by the nature of the housing market, have a tough time competing with discount-priced foreclosures. So its no surprise that the builders, like the Realtors, are worried about how the government might decide to sell REO. Mr. Nielsen urged the GSEs to avoid a fire sale of foreclosed properties so as not to depress prices further. The builders also urged converting foreclosures into rentals in a way that doesnt concentrate rental properties in to close clusters. The builders also urged a host of modifications to federal programs, including FHA-backed financing, the USDA Rural Development program and the Neighborhood Stabilization Program to be more open to investors. The builders also advocate a lease-to-own scheme.

Chris Krehmeyer, president and CEO of Beyond Housing, a St. Louis-based nonprofit affordable housing organization: As head of a group that works to limit foreclosures on a local level, Mr. Krehmeyer said his first priority is keeping as many families in their homes as possible. Accordingly, he wants to align the investor communitys interests with those of homeowners. However it looks, the plan to rent foreclosed homes should include a commitment from investors to hold on to homes for three to five years and maintain investment properties. Unlike the Realtors and the builders, though, Beyond Housing advocates for bulk sales, calling for a wholesale-like property disposition program.

Laurie S. Goodman, senior managing director of Amherst Securities Group: Ms. Goodman outlined the size of the foreclosure problem with extensive research behind her well-supported points. There are 4.5 million non-performing loans, of the total 54.9 million nationwide, Ms. Goodman notes, but she emphasized that there are an additional 10.4 million borrowers that are reasonably likely to default. Any plan for foreclosures must address these borrowers as well. Ms. Goodman also noted that the current supply/demand imbalance in the market has less to do with overbuilding than it does with simply a dearth of borrowers who are able to buy, because of the tough economy and because of tightened credit standards.

The solution? Policies that encourage investor-owned homes for rent. The problem, of course is that it is hard for big investors to buy enough foreclosed homes at a time for their investment to be worth it. Amherst feels that the way to solve this problem is for the GSEs, with the blessing of their regulator, the Federal Housing Finance Administration, to bundle and sell large numbers of REO properties and non-performing loans on an all-or-none basis, in a geographically specific auctions. Ms. Goodman said that 80% of these homes should be held for three years, at minimum, before they are sold, and Fannie and Freddie should get involved in helping finance these bulk purchases. Another option would be for Fannie and Freddie to retain equity in a rental-sale program, in the form of a joint venture.

Stan Humphries, chief economist for Zillow: One major point Mr. Humphries made was that policymakers shouldnt underestimate the markets ability to fix itself, a process that is already underway. Investors out there in the free market, he says, are already scooping up properties to rent out, and dont need the government interfering with that market by becoming landlords and creating undue competition. This would chill investor interest in rental housing and would convince more potential homeowners to rent instead of buy. Mr. Humphriess testimony did not opine on the usefulness or dangers of bulk sales versus individual sales, but in an interview, he clarified his position, saying that he is opposed to bulk sales by the GSEs without the caveat of requiring investors to rent out the homes. That in my perspective, is problematic, because I do think the private market is stepping into this area pretty strongly. Theyre stepping in and arbitraging the market in that theyre buying homes at a discount and renting them out in a market that is strong, and rental rates are actually rising.

By Robbie Whelan

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