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The national interest is not served by policymakers' hatching yet another bad idea for how to keep millions of people in homes they can't afford.
April 6 -
Carrington Capital Management is not a bank; it competes with them, and its inner workings raise unsettling questions about the mortage market and some proposals to fix it.
February 24 -
The foreclosure crisis has turned Fannie Mae and Freddie Mac into big property owners, but neither has become a significant landlord.
October 13 -
Major community home counseling nonprofits are experiencing what virtually every financial institution is now recognizing: Despite the massive reorganization of the Obama administration's homeownership priorities, the number of foreclosures will continue to accelerate, and no end is in sight as declining home values and increasing unemployment continue unabated.
May 1
The government is looking for new ways to dump its massive backlog of foreclosed homes, but some experts are warning it against becoming a major landlord.
On Wednesday the Obama administration solicited ideas for disposing of the real-estate owned properties held by Fannie Mae and Freddie Mac. Some investors and property managers have suggested that, until buyers' demand increases, the government should rent out the houses.
But the pitfalls of a rental strategy are both reputational and practical, housing experts said.
The government could be perceived to be promoting outsized returns for investors and property managers, while the expense of managing properties could chip away at its future profits. Some experts also think the government cannot rent out enough properties to staunch a decline in home prices.
"The government should not be in the middle of it," said Ivy Zelman, the chief executive of Zelman & Associates, a New York housing research and advisory firm.
The Federal Housing Finance Agency, which oversees Fannie and Freddie, initially opposed a rental strategy, sources told American Banker. But the FHFA joined the Treasury Department and the Department of Housing and Urban Development on Wednesday in publicly requesting information on ways to dispose of REO assets.
Stefanie Johnson, an FHFA spokeswoman, said the agency "is open to considering initiatives that are consistent with the goals of conservatorship."
By renting out REO properties, the government would solve an underlying problem of supply and demand, said Peter Swire, a former Obama administration official who is now a law professor at Ohio State University.
Namely, there are too many foreclosed homes in the pipeline and too few potential buyers.
"Many families have taken hits to their credit history and cannot qualify for today's mortgage requirements, so there is less demand to buy homes," Swire said. "And we need more affordable rentals."
But there is a genuine divide among REO experts about whether renting would simply kick the can down the road or would actually lead to a more orderly absorption of the existing inventory.
Some housing experts say "lease to own" programs would essentially reward defaulted borrowers that have been living in their homes rent-free, sometimes for up to two years. They say the government is prolonging the housing downturn by continuing to offer these borrowers modifications and not pushing the homes through foreclosure and REO.
Others say the government-sponsored enterprises could potentially reduce their quarterly losses if holding properties off the market allowed home prices to stabilize.
Some of those proponents would reap the profits of a government rental strategy. One potential beneficiary is Carrington Mortgage Services LLC, which currently manages 4,000 to 6,000 Fannie-owned properties as part of a program that protects renters from being evicted when a property owner goes into foreclosure.
Carrington collects property management fees for reviewing the "livability" of a home, examining current leases and determining a tenant's ability to pay.
"Instead of flooding the market with REO properties for sale, which will extend the downward cycle and depress prices, our strategy is to rent properties, wait for the market to settle, and cash flow the properties, in the meantime providing dividends to investors and ultimately (seeing) home price appreciation instead of selling at a loss," said Steve Ozonian, Carrington Mortgage's chief real estate officer.
Carrington is based in Santa Ana, Calif., adjacent to the district represented by Rep. Gary Miller, R-Calif. Last month, Miller introduced legislation that would allow Fannie, Freddie and large banks to lease REO properties for up to five years.
If passed, the legislation would ultimately ensure a steady stream of property management fees that companies like Carrington could collect on REO rentals. Megan McCormack, a spokeswoman for Miller, would not say whether Miller had spoken to Carrington about the proposed legislation.
"No matter what happens (to Fannie and Freddie), the assets will remain and whoever owns those assets should have the ability to lease them, if they so choose," said McCormack.
She dismissed concerns that the legislation would increase the government's role as a major property owner and landlord: "Giving businesses this option is entirely a Republican principle."
Becoming a landlord would have some practical downsides for the government. Though it would generate cash flow, the GSEs would have to pay significant expenses to repair and upkeep the properties.
"They are asking for further trouble down the road when they have to come up with maintenance and renovation costs every time a renter moves out," said Gary Crabtree, an appraiser in Bakersfield. "This will be a huge expense, having to hire management companies to rent and oversee their rentals," he said.
Laurie Goodman, a senior managing director of Amherst Securities Group LP, agreed that rentals have inherent problems.
"If the toilet breaks at midnight, someone has to fix it," she said.
An easier solution would be for policymakers to encourage investors to absorb the excess inventory by making financing more available, she said. Investors currently are limited in the number of properties they can purchase from the GSEs. They can finance up to four properties with Freddie and up to 10 with Fannie.
"It is very clear that policymakers need to aid the creation of a new asset class — investor-owned homes for rent," Goodman wrote in a recent report. "Thus far, the overwhelming majority of the rental units are in multi-family properties. That has to change."
Goodman estimates there are 2.8 million homes in the so-called "shadow inventory" of homes that are in the process of foreclosure. Another 500,000 are real estate-owned by both banks and Fannie and Freddie. Because homes are being sold in dribs and drabs, averaging just 93,000 a month, it will take two and a half years to liquidate the backlog
Zelman also argued for the government to ease financing, adding that owners of apartments with 50 or more units have access to cheap financing where single-family property investors do not.
"If the GSEs expanded mortgage capital for non-owner occupied homes at attractive rates, investors that are already in the market would be highly interested in the cheap leverage and would potentially be able to pay more for the REO," Zelman said. "As long as down payments were set high enough, investors would have enough skin in the game where default risk would be low and it would be geared toward true investors, rather than the speculators that previously permeated the market."
John Helmick, the CEO of Gorilla Capital Inc., a Eugene, Ore., purchaser of REOs, said he would jump at the chance to get cheaper financing.
"If they wanted to get higher prices for REOs they could offer 70% financing," Helmick said. "They have this inventory of houses and they want to get it off the for-sale market but they won't take the obvious solution, which is to just put them all up for sale."
"Obviously it's political, because people vote and there would be a period of serious pain if everything came on the market," he added. "But we've got to go through a lot of pain."
