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Administration Housing Policy Hampered By Fits and Starts, Half-Formed Ideas

Ezra Klein writes this morning that mass refinancing is the “biggest thing” President Obama can do to aid the economy without the input of Congress. That’s not actually true, even in the context of housing. He could direct Treasury to use the unused $42 billion of HAMP money to provide mass principal write-downs. He could through the Justice Department sue lenders and servicers for acts of fraud, gaining leverage toward a much larger settlement that actually reflects the nature of the problems in the mortgage market. Heck, the principal pay-down program being mulled at FHFA will do more for borrowers than refinancing.

But it’s worth pointing out that the President has already made this change, with the second round of expanded HARP rules. The problem, apparently, is that the release of representation and warranty claims, a key element that servicers sought to make the refi changes, doesn’t become operative until March. It defies belief that you would announce a refi plan, and then have to wait four months for the pickup. Even Klein’s plan for Obama to make clear the new refi rules in the State of the Union won’t have an effect, because it will be a month or more until the reps and warrants claims get extinguished. In fact, mentioning it would be worse, because borrowers would then go to their lenders, only to be told to wait a while, sparking a negative impression of the program.

It’s not even really true any longer than Ed DeMarco is the holdup here. DeMarco has at least considered the principal pay-down program, which will certainly be better for troubled borrowers who need the help. The refi program is better for stimulus than for saving homes. The real problem with DeMarco is his short-term, short-sighted focus on mitigating loss, when in the long run that policy will end up costing the government money. But that may be changing.

The other housing program on the periphery here is to convert foreclosed homes into rental properties, which is apparently imminent.

The Obama administration, in conjunction with federal regulators and led by the overseer of Fannie Mae and Freddie Mac, are very close to announcing a pilot program to sell government-owned foreclosures in bulk to investors as rentals, according to administration officials.

There are currently about a quarter of a million foreclosed properties on the books of Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) and millions more are coming […]

As the Federal Reserve alluded to in its white paper on housing last week, “a government-facilitated REO-to-rental program has the potential to help the housing market and improve loss recoveries on reo portfolios.” REO’s (Real Estate Owned) are bank-owned properties, or, in this case, properties owned by the GSE’s and the FHA. Three Fed governors pushed for similar plans in speeches last week as well.

A pilot sales program will be starting in the very near future, according to administration officials. They are working on what the market potential is, what pricing would be, how government can partner with private investors, and who has the operational experience to manage so many properties.

The better policy would be Dean Baker’s “own-to-rent” idea, that keeps the same people in their home instead of forcing them out in the first place, converting mortgages to rental agreements. Also, REOs in suburbs and exurbs may not actually make for attractive rental properties, so the idea that this program will successfully reduce vacancies may be hype. There are other problems with bulk REO sales to investment groups.

Will the Obama administration’s upcoming plans to sell REOs in bulk to mega-investors…be bad news for small-scale investors who no longer will be able to compete because entire chunks of the agencies’ portfolios will be stamped “for bulk only”? Won’t this further the impression that Washington favors the fats cats on Wall Street over Mom and Pop on Main Street?

Current REO disposition techniques appear to be working well — lowering inventories, yielding significant recoveries for the government, putting owners into houses and yielding significant commission dollars to the brokers, agents and ancillary service providers around the country who help make this all happen.

Which raises the question: Why mess with success? This past Aug. 10, the Treasury Department, HUD and the Federal Housing Finance Agency — which oversees Fannie and Freddie in conservatorship — issued an unusual “request for information” on how they might sell REOs faster by offering homes in giant bulk sales of $50 million to $1 billion.

In other words, the REO-to-rental deal would disrupt a working system for the benefit of Wall Street tycoons like hedge fund managers and national real estate groups. I understand Administration beliefs that another crush of foreclosures is on the way, which the current system may not be able to handle. But hedge funds and institutional investors don’t necessarily have a history of rental management and could make things worse.

Once again, the changes the Administration has proposed may not have much of an impact for the housing market, and the changes that would have an impact aren’t being put forward.

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David Dayen

David Dayen