While officials are gearing up for tomorrow’s meeting on GSE reform, the GSEs are losing millions of dollars every hour. Why? Because home prices are falling again. We have a solution.
Recent Market Changes: When the tax credit expired on April 30, home buying activity slowed 30%+ and hasn’t rebounded much while the number of homes for sale has risen. With lower demand and higher supply, it is once again a buyer’s market, where sellers are forced to drop price if they want to sell. It will take almost 1 year to sell every home on the market right now! According to our proprietary survey of home builders across the country, new home prices nationwide have dropped 3% since the tax credit expiration, with declines in 9 of 10 regions, and we are seeing similar signs in the resale market. Falling home prices hurt almost everyone, especially Fannie Mae and Freddie Mac and the taxpayers that are now backing them.
DC Trip: We spent much of last week in Washington D.C. informing HUD, Treasury, Fed, Fannie Mae and Freddie Mac officials of what was going on. While most were not surprised about the price declines after we laid out the facts, we were pleasantly surprised at how much traction our proposal to help alleviate the problem received.
Proposed Rental Housing Solution: Falling home prices don’t help anyone, and anyone who says we can let the free market take care of things is saying that it is ok for taxpayers and the banking system to lose many more billions of dollars, virtually assuring another recession and maybe worse. To boost housing demand and limit supply, we propose the following:
- Create an Apartment REIT: Distressed sales need to be kept off the market. Rent out the Fannie, Freddie and FHA REO (owned properties through foreclosure). These properties currently comprise 42% of the 562,000 REO and a large percentage of the 5.1 million homes currently in the foreclosure pipeline (already 90+ days delinquent or in foreclosure). This is best accomplished by contracting with an outside firm (competitively bid of course) to manage local property management firms. The rental income will be self-sustaining and the properties will be financeable in the public markets, just like publicly traded REITs are financeable. The GSEs will benefit from future price appreciation too, as opposed to being damaged by further price deterioration. The Banks, who currently own 22% of the REO, should also be allowed to contribute properties to the REIT. The Administration can keep pushing for loan mods if they want, and we heard over and over again how government doesn’t want to foreclose on people. All we ask is that you keep the distressed sales off the market.
- Loans to Landlords: To stimulate demand and restrict supply on non-GSE distressed sales, have the GSEs make very safe loans to individuals or corporations who will promise to rent them out for an extended period of time. The GSEs should make a tidy profit on these loans, while also helping provide affordable rental housing to those who need it.
- Keep Mortgage Liquidity Flowing: Housing is extremely affordable right now, but the uncertainty in the mortgage industry is making underwriting more challenging, and uncertainty in the economy is hurting buyer confidence. Stop changing the underwriting rules so everyone knows what is required, and keep the fantastic financing environment. Once the economy turns around, real buyers will return to the market.
I believe that the solutions above will also help restore home buyer confidence that prices won’t plunge, which will boost demand.
GSE Reform: As far as GSE reform goes, the answer is simply to turn back the clock. Fannie Mae was formed in 1938 to create mortgage liquidity, and the GSEs have played a very useful role in preventing another Great Depression, so we still need them. However, the GSEs need to be told ASAP that elected officials are not going to pull the rug out from under them so they can focus on helping manage us through the remainder of this crisis. Turn back the clock to:
1967, which was the last year before Fannie Mae became a publicly traded corporation. It is impossible to serve two masters, and allowing the entities formed to assure mortgage liquidity to have their strategies dictated by shareholders was a grave mistake.
1998, which was the last year before elected officials mandated that Fannie and Freddie grow homeownership by making more aggressive loans to low income households.
I am sure this will create some controversy, particularly among extremists. I am staying out of the politics and making recommendations that I believe are sound business advice. For those who are running the troubled balance sheet of The United States of America, you need to act quickly to make sure that your asset values don’t plunge. Only those who want to see you go bankrupt will oppose these ideas.
