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The imminent deluge of foreclosures on the horizon has caused the Administration to take pause, reconnoiter and request ideas for stabilizing housing prices. Although no official proposals have been made, the prevailing official idea is to rent the Federal Housing Administration’s (FHA), Fannie Mae and Freddie Mac’s nearly 250,000 real estate owned properties (REOs). [For more information on California’s REOs, see the July 2011 first tuesday article, REO resales in California.]

Two prevailing ideas are currently on the table: bulk sales to buy-to-let investors and investor/government sponsored enterprise (GSE) joint ventures.

Under the bulk-sales program, non-profit organizations and/or private investors would bid on low-priced pools of REO assets conditioned on their renting the properties for a period of time. This proposal is preferred by the Department of Housing and Urban Development (HUD), as it requires investors to assume all risk associated with the properties and releases the government from property management duties.

Alternatively, investors could collaborate with the GSEs in a joint venture. Under the joint venture proposal, a national property management company would be responsible for renting and maintaining the properties while the investors would share in the rehabilitation costs and revenues from the rentals.

The request for information expires on September 15th, 2011. You can view the request in its entirety here.

first tuesday take: The REO rental project is a strategy far superior to reintroducing homebuyer subsidies since subsidies create no buyers and serve only to cannibalize tomorrow’s buyers, setting up next year’s market for failure or explosion.

The great flood of REO inventory has long been upon us: it is in its fourth year and will be with us for at least another five. The administration can devise any variety of plans to stem the flow of excess inventory, but we must also address the present cause, not just the past action that financed this excess inventory into existence.

Today, the lack of sufficient job stimulus and the 2005 congressional termination of bankruptcy cramdown authority are enhancing the strength of the advancing REO storm. The government’s continued folly in these regards is bringing on a second wave, which will start rolling-in next year, not unlike the tsunami effect that kicked-off massive delinquencies in mortgage payments. [For more information on the tsunami effect, see the October 2010 first tuesday article, Is homeownership a luxury or a necessity?]

Rather than devising a complex battle plan, it would be better to simply drop the prices of REOs in the local multiple listing service (MLS) and let the torrent of buy-to-let investors arrive. And they will arrive, if the government gets the price right, and so will homebuyers — this is a delightfully obvious idea the administration seems to have missed.

As we are currently seeing with the Federal Reserve (the Fed)’s monetary stimulus, the Fed can lower interest rates and make money as cheap as they want, but if people don’t have jobs they are not going to borrow. At the same time, others with jobs sense they too should put off borrowing until the strength of the job market promises improved job security.

The same can be said of the government’s rental proposal. California is still suffering from an inverse relationship between the homeownership rate and the rental vacancy rate. In a stable economy, if the homeownership rate falls the rental vacancy rate diminishes in kind, as displaced homeowners rent their shelter.

However, since our current real estate market downturn is directly linked to present economic stagnation, the typically tandem homeownership rate and rental vacancy rate are now running counter to one another. This recession phenomenon results from a greater concentration of occupants in fewer residences. [For more information on the California homeownership rate as it relates to the rental vacancy rate, see the May 2011 first tuesday article, Rentals: The Future of Real Estate in CA?]

Many of the homeowners who are displaced due to foreclosure are either unemployed or underemployed and seek shelter with family or friends. Thus, whether the market is flooded with vacant single family residences (SFRs) for sale or vacant REOs for rent, odds are they will remain vacant until the greater economy stabilizes (read: job creation, consumer confidence, increased wealth). [For more information on how jobs affect California real estate, see the August 2011 first tuesday article, Reeling from California’s lack of jobs.]

The Administration also needs to conjure up a separate plan to keep the foreclosures from coming for five more years and stop the damage to the nation’s homeownership policy. This plan to stop the buildup of REOs must take two forms:

  • a legislative mandate for home mortgage principal reductions to a 94% loan-to-value ratio (LTV) for all employed homeowners with negative net worth statements (read: cramdowns reinstated in Chapter 13 bankruptcies); and
  • job creation by the employer of last resort. [For more information on cramdowns, see the January 2010 first tuesday article, Cramdowns, cramdowns, cramdowns!]

re: “Feds seek ideas on renting foreclosed homes owned by government” from the Los Angeles Times