The US Government and the Foreclosure Crisis: Out of Ideas or Out of Will?
It’s old news that federal housing agencies need better ideas about what to do about the foreclosure crisis. The new development is that they realize it and have issued a blunderbuss “RFI” (request for information) seeking ideas from anyone willing to write in by September 15 describing business structures for the government to off-load foreclosed properties it is holding, particularly in “large scale transactions” to deal with the scale of the problem of lingering “inventory.” See here. An RFI is something short of an RFP (request for proposals). Indeed, this new RFI is careful to note the distinction and also that there may never be a call for actual proposals. So let’s not get too excited. Furthermore, the problem of the continuing foreclosure crisis seems to be less about ideas than about will to act. Most disturbing, the RFI does not even allude to the possibility of beefing up foreclosure prevention as an important way to stem growth in the volume of unsold and vacant foreclosed homes.
So first, what is the government looking for? Specifically, the Federal Housing Finance Agency (FHFA), in consultation with Treasury and HUD, seeks new options for selling foreclosed one-to-four unit properties held by Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA). Bulk sales might be for resale, rental or demolition.
FHFA is conservator for Fannie and Freddie, the government-sponsored entities (GSEs) that predominate in the secondary mortgage market and that went belly-up in the foreclosure crisis and were taken over by the government. FHA, a government agency funded with premiums rather than tax dollars, is the largest insurer of mortgages in the world. Together, these three entities held over 250,000 foreclosed homes as of the end of June, about half of foreclosed residential inventory. Much of this inventory is moldering, causing havoc in neighborhoods and keeping home prices depressed. Another 830,000 homes are supposedly in the foreclosure pipeline heading toward GSE or FHA ownership. “Shadow” inventory, meaning homes expected to end up sold at foreclosure, continues to cast a pall over the housing market and economic recovery more generally. Given the potential size of the problem, FHFA particularly wants proposals to deal with $50 million to $1 billion in assets at a time, and it has the power to go forward without the need for deadlocked Congress to act.
So it is worth coming up with new ideas, even if belatedly, or recycling old ones, and some are excited at the prospect. Mortgage News Daily, for example, has relentlessly covered ideas for using foreclosed homes to bring down prices in the rental market, including rentals to “previous homeowners.” (Comment: What about keeping them in their homes in the first place, perhaps as renters, which those without equity effectively are, but at more affordable rates? See here for such a proposal, but since it depends on congressional action, forget about it. We don’t need foreclosures to get there.) The government’s RFI specifically mentions that it is seeking ideas for business structures for sale of foreclosed homes to be used as rental property (along with approaches to sale for resale or demolition). The Center for American Progress is enthusiastic, saying that good approaches “could generate much-needed revenue for the government, expand the quantity of energy efficient, affordable housing to thousands of American families, and create well-paying jobs.” But a note of caution, CAP first put forth the idea of selling foreclosed properties to investors to be renovated and used as scatter-site rentals a year and a half ago. Similar ideas have already been implemented, for example in Los Angeles and Cleveland, using nonprofits as developers and with lease-purchase options so that longterm renters can become homeowners. See here. These sorts of projects have sometimes involved use of foreclosed homes in distressed neighborhoods, turned over at low prices or essentially as gifts from local taxing authorities.
Efforts to put foreclosed properties to good use could be swamped if we don’t also direct more energy to stemming the tide of inventory, a euphemism for what is left after people are tossed out of their homes. Specifically, it would be nice to see foreclosure prevention linked in the government policy mill to the problem of dealing with foreclosed property. Seemingly lost in the shuffle is the irony of focusing on large-scale transactions to rent foreclosed properties, to a market that includes their former owners. Sure, FHFA could implement a program of large transactions in sales of foreclosed homes without congressional action. But it could also act on its own to implement proposals to have the GSEs modify loans or convert loans to rentals, keeping people in the same homes under different terms while also reducing relocation and transaction costs and emotional toll. Not all foreclosures can be prevented, but FHFA has done far too little to reduce the inventory problem by keeping properties from becoming foreclosed inventory in the first place.