Let's cut to the chase. With all the shouting, flailing and verbosity on the subject of the REO problem, does anyone offer a practical, workable solution?
Last summer the FHFA issued a public 'Request for Information' to gather input and ideas for possible solutions to the huge inventory of government-owned REO properties.
Circumstances must be dire indeed for the government, in all its wisdom, and with virtually unlimited resources, to solicit assistance from the American public at large. This 'Request for Information' was to lead for a more formal, 'Request for Proposal' after reviewing responses. Some 4,000 submissions later, the Federal Reserve has cast its vote in favor of a plan to liquidate GSE-owned REOs through a series of bulk sales, presumably at prices that would attract sufficient interest and investment by private capital sources.
So what will be the fate of all these homes once they become the property of groups of large investors? One of the more popular ideas is that these investors will offer the properties they acquire for rent to the millions of former homeowners displaced by the loss of the very homes they once owned. A practical, if not ignoble concept. Banks make home loans, people buy homes, housing market collapses, people lose homes, banks take back homes, government bails out banks, government and banks take homes back, government sells homes back to investors, investors rent homes out, previously owned by people who have lost them, back to their former owners and alas... property owners become tenants ... just as they were before they purchased their homes in the first place. Ironic, perverse, regressive ... put whatever label on it that you will. But the 'American Dream' has become a veritable 'nightmare.' Decades of sacrifice, savings and hard labor down the drain. Trillions in home equity wiped out. The cycle has come full circle. The 'have nots,' become the 'haves,' only to become the 'have nots' once again.
Do the rich indeed become 'richer?' Rarely do the rich become poorer. Do the poor become poorer? Odds are stacked against the poor to become richer. And what of the middle class? What we used to refer to as the 'middle class' has become blurry at best.
The middle class in America is asked to bear the burden of not only the poor, but is also subsidizing the rich. Even legendary billionaire investor Warren Buffett said that his own secretary pays income taxes at a higher rate than he does. What's wrong with that picture? The Obama administration wants the wealthiest of Americans to “Pay their fair share.” Republicans oppose higher taxes for any Americans, rich or poor. With the federal deficit at record highs, the 'tipping point' is growing ever nearer. Something or someone, or many someones, must give.
There are no easy answers. In fact, despite a plethora of opinions, ideas, proposals and the preponderance of 'noise' on this issue, few realistic solutions have been forthcoming. Criticisms and finger pointing are easy ... there is plenty of blame to go around. It is much harder though to come up with a practical, workable solution ... one that can garner sufficient support to actually be implemented.
Many potential ideas have been proposed. Some reasonable, some ludicrous. Possible alternatives, with no judgement as to popularity, practicality, or potential economic consequences are as follows:
1. Mandate that lenders reduce principal balances on existing home loans to conform to current market values.
2. Let lenders rent/lease back REO properties to tenants, thus providing additional housing stock and reducing the losses created by carrying vacant homes.
3. Sell REOs in bulk to investors and investment groups to either re-sell or rent for income.
4. Require banks and other mortgage lenders to refinance 'underwater' homeowners at current market rates, thus making their homes affordable and avoiding foreclosure.
5. Create a 'Bad Bank' that will acquire and absorb most if not all lender-owned and other non-performing REO assets and manage and/or sell them.
6. Allow the 'too big to fail banks' to fail, and nationalize the failed banks.
7. Forgive all delinquent mortgage debt, regardless of payment history, equity position or property market value.
8. Continue to let current foreclosures work their way through the system, without modification or intervention by state or government authorities and allow the free market to find 'equilibrium' and stabilize itself based on current market conditions.
Other proposals are essentially variations of those listed above. Clearly, there is no consensus on any of the above scenarios. Some homeowners feel that inasmuch as their taxes provided the 'bailouts' to the banks, that the government, and/or the lenders should extend assistance to them also. “Where's my bailout?” has become a familiar rallying cry for that group. Others, however, oppose the idea of 'rewarding' reckless homeowners that got in over their heads, borrowed more than they could repay, and now want lenders to take a 'haircut'. Refinancing 'upside down' borrowers with good payment histories at market interest rates seems reasonable, and there is an initiative to do that, but it would only help a relatively small fraction of affected homeowners. Many would be ineligible for the proposed program. Further, it is unlikely that any comprehensive solution could be implemented without protracted debate or delay, which might render any option ineffective or simply too late to address the problem.
In general, it seems that the lines of debate are divided between two basic approaches: 1. Provide refinancing or some debt forgiveness to borrowers who are either 'underwater' or in foreclosure, and allow them to retain ownership of their property...
OR
2. 'Let the inventory of delinquent homes work their way through the system through foreclosure and not reward or assist property owners who got in 'over their heads' with debt, or who no longer have the ability to service the debt on their homes, whether due to job loss, ill health, or other financial hardship.
Given the depth of the housing crisis, it would appear that some definitive solution, either way, would be better than stagnation or inaction. Absent a clear direction or decisive action one way or the other, this crisis seems sure to further degrade. Ultimately the situation must come to a resolution. The only questions seem to be how and when the matter will be resolved. However, despite strong convictions on all sides of the issue, it appears that definitive legislation is the only answer. What result such legislation would achieve is still very uncertain. Then there's the 'occupy' movement, but we'll discuss that phenomenon in a future article.
(Third in a series of articles on the REO industry written by Philip Wegener)
Philip Wegener is a Los Angeles based mortgage-industry executive and President/CEO of Central Mortgage Asset Management.
