Hasten Foreclosures, Don't Delay Them

Though well intentioned, the government’s plan to end the housing crisis is missing the mark, a pair of economists said at the recent annual Midwinter Housing Finance Conference in Park City, Utah. John Burns, a Southern California consultant, and Larry Miller, a real estate professor at the University of San Diego, took on the effort to stem foreclosures, saying, in Mr. Burns’ words, that “it won’t help much.”

Noting that 600,000 foreclosures a year are normal in even the best of times, the founder of John Burns Real Estate Consulting, Irvine, Calif., told the conference that the number of repossessions will run at an annual rate of 2.5 million through 2012.

Mr. Miller said only 10%-15% of those homeowners who are in imminent danger of losing their homes can be helped by the Obama administration’s plan to rework their loans. Most people won’t qualify because they have lost their jobs, gone through a divorce or are too far underwater, he said. Besides, he added, “Some people are not destined to be homeowners.” Rather than slow down foreclosures that are all but inevitable, they should be speeded up, Mr. Miller said. “Foreclosures are actually a way out” of the current housing conundrum. Mr. Burns agreed, adding that lenders should be selling their real estate-owned to well-heeled private investors who can turn the houses and apartments into rental units. As long as investors put up decent downpayments in the 20%-30% range, he said, “It’s stupid not to make loans to these people.”

Mr. Miller, a co-founder of Collateral Intelligence, a firm which helps investors price assets, would go further by raising the conforming loan limit “to the sky” so Fannie Mae and Freddie Mac can effectively “buy down” the wide interest-rate spreads that now plague the jumbo mortgage market. “The lack of liquidity is hurting the housing market as much as anything else,” the real estate professor said.

Mr. Burns pointed out that less than three out of every five households have the credit deemed sufficient to purchase a home, and only 20% have the funds necessary for a downpayment. Moreover, he pointed out that while it appears that resale listings are shrinking, banks are still not selling much of their real estate-owned. “Some 80% of the foreclosures in the last 12 months are not yet listed for resale,” he said.

Mr. Miller agreed, explaining that many lenders are holding off putting their REO on the market until they see what the federal government will do. But he warned that when lenders do put their foreclosures into local multiple listing services, they could be pricing the properties too low unless they price by ZIP code as opposed to the local market in general, and then only if they pay closer attention to forward-looking indicators rather than those which look only backward.

On a brighter note, David Stiff, chief economist at vice president of quantitative research as Fiserv, predicted that the housing market is already two-thirds of the way through the current downturn. There are only three or four quarters to go before recovery begins in early 2010, he told the meeting. “Prices will rise one year after sales stabilize,” he ventured.

At the same time, though, Mr. Stiff warned more downward pressure will be put on home prices by 2011 when another wave of defaults once again adds to the supply of unsold houses. The Fiserv economist called the financial crisis the worst since the Great Depression and the housing market collapse “the worst price bubble in U.S. history.” Until the credit crisis ends, he added, the housing market won’t recover.

Also at the conference, there were plenty of ideas of what to do with the heretofore sacrosanct deduction for mortgage interest. But capping wasn’t one of them.

Rather than limit the write-off, as President Barack Obama proposed in his budget for fiscal 2010, Mr. Burns said he would double it. On the other hand, New York financial analyst Andrew Davidson would do away with the deduction completely, replacing it with a homeownership tax credit. And John Courson, president of the Mortgage Bankers Association, wouldn’t touch it at all.

Instead, Mr. Courson would “go the other way” by allowing borrowers who don’t itemize to claim the write-off anyway.

As the MBA and the other members of the housing lobby see it, the administration’s plan to cap deductions for mortgage interest, property taxes and charitable contributions starting at households earning $250,000 or more ($200,000 for single taxpayers) misses the mark completely.

“At this time, of all times, to suggest this is totally counterproductive,” Mr. Courson said, “for all the good work this administration is doing to stimulate the housing market, this is going the wrong way.”

The MBA executive, who led an MBA contingent here that included its current chairman, David Kittle of Vision Mortgage, Louisville, its next chairman, Rob Story of Seattle Mortgage, Seattle, and its chief lobbyist, Steve O’Connor, said a better idea would be to extend the write-off to non-itemizing taxpayers who buy a house over the next six months or so. “We need to find ways to stimulate housing,” Mr. Kittle said in seconding the proposal.

Mr. Burns called the Obama plan “disastrous.” To give housing and the economy as a whole a swift kick in the pants, the consultant would double the deduction through at least 2010 for the first $15,000 in interest paid by owner-occupants on all fully amortizing, fixed-rate mortgages of 40 years or less.

The idea is expensive, the consultant to builders, developers, bankers and investment firms conceded. He estimated the cost at about $188 billion annually (assuming 50 million borrowers) and suggested that the plan be extended a year at a time until it was no longer necessary.

Mr. Burns said the change would encourage more people to stay in their homes and increase their disposable income, which they will save and spend. It also would “create a sense of urgency” and encourage “responsible people” to buy rather than rent.