If you want to raise home prices across America then the obvious solution is to encourage foreclosure purchases.
“Foreclosure inventory is the blight that holds down appreciating home values,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com. “You can’t get to the promised land of higher home prices unless you first resolve the foreclosure mess. That means avoiding foreclosures when practical, getting distressed properties off the market and attracting investors to speed the process.”
Think of it as a kind of financial recycling, something we do with regularity. When the S&L crisis caused the failure of almost 750 thrifts investors were asked to buy failed institutions. When the hedge fund Long-Term Capital Management had to be bailed out in 1998, the government asked a number of banks to step in and rescue the company with billions in cash in exchange for 90 percent equity — an investment.
Most recently, the American Recovery and Reinvestment Act of 2009 set aside $2 billion for “emergency assistance for the redevelopment of abandoned and foreclosed homes.”
To this point, however, lenders and the government have done little to help real estate investors, a view which may now be changing.
Just The Facts
It was in 2008 when JPMorgan Chase greatly expanded its turf and territory by acquiring Washington Mutual, once the country’s largest S&L. Today, JPMorgan Chase is the nation’s second largest bank with more than $2 trillion in assets.
The attraction of WaMu was that it had 2,200 branches in 15 states, areas largely un-served by JPMorgan Chase’s existing branch network. But WaMu also had something else, a $176 billion mortgage portfolio that was expected to produce more than $30 billion in losses, much of it from $50 billion in option ARMs.
So JPMorgan Chase acquired certain WaMu assets — but not all liabilities — for $1.9 billion. Among the assets it acquired was the WaMu loan portfolio.
Given this history you might believe that JPMorgan Chase, an investor, would think highly of real estate investors. In fact, the company’s perspective is evolving.
Consider a profile that appeared in the New York Times Magazine regarding JPMorgan Chase CEO and Chairman Jamie Dimon. Writer Roger Lowenstein says:
“At the Monday meeting I attended, Ravi Shankar, a senior executive in Chase’s mortgage business, described a new program to modify a batch of particularly bad loans that Chase inherited from Washington Mutual. The WaMu loans were due to ‘reset’ to roughly twice their current interest rate, at which point many of the borrowers would probably default.
Shankar’s unit had reduced the principal on billions of dollars of these mortgages by about a sixth, bringing them in line with market value. Dimon snapped, ‘I wouldn’t do modifications on investment properties.’ People who bought real estate as a speculation are a sore spot with Dimon. They have defaulted at epidemic rates — many after fraudulently claiming to be purchasing a primary residence. (One asked Chase for modifications on nine different loans.) Shankar responded that the program has been offering modifications to investors. ‘Well I hope you chose the right people, Shankar’ — Dimon’s tone was jocular but edgy. Armed with statistics, Shankar reported that, so far, the program was succeeding in reducing foreclosures. The numbers seemed to bring Dimon on board, and he exclaimed, ‘We should try aggressively to do as much as we can for these folks.’” (See: Jamie Dimon: America’s Least-Hated Banker, December 1, 2010)
In two short paragraphs we gain some remarkable tidbits:
- JPMorgan Chase is offering massive principal reductions to selected borrowers. This is going to be big news to a lot of people in the lending community who adamantly oppose such reductions.
- Monthly mortgage costs for large numbers of unlucky WaMu borrowers are about to lurch skyward, an event which is unlikely to reduce foreclosure levels or company costs.
- Mr. Dimon is distressed with borrowers who have multiple investor loans. But one has to ask: Did not WaMu carefully underwrite such mortgages? Don’t most businesses seek repeat customers? How many of those foreclosures are related to local economic downturns and the loss of jobs rather than inappropriate risk?
- With super-hero speed, Mr. Dimon shifts from overt investor distrust to open arms.
You can see where this is going. Mr. Dimon can lose big money dropping mortgage balances by a sixth and he can lose more by increasing his foreclosure inventory. Or, he can offset his losses by welcoming anyone who might buy down his stock of distressed homes, including investors.
I bring up Mr. Dimon not because he is a culprit in the foreclosure mess — it was WaMu who generated vast numbers of option ARMs, not JPMorgan Chase. Instead, as leader of the nation’s second-largest bank Dimon needs to turn around the thinking of fellow bankers and regulators.
The Role of Investors
Real estate investors represent a vast national asset that to this point has been largely untapped and certainly — if there is such a term — under-tapped.
The question that lenders and government policymakers need to ask is this: Who has the financial capacity, the interest and the risk tolerance to buy foreclosed properties? Yes, some will be bought by owner-occupants but what about the rest?
It’s plain that banks don’t want distressed houses, the government can’t afford to buy them and potential owner-occupants are increasingly happy to rent. Figures from the National Association of Realtors show that existing home sales were selling at an annual rate of 4.53 million units in September — that’s down 25.9 percent from a year earlier.
The math and the logic are fairly obvious: If we want to speed an end to the foreclosure mess than we need to take two steps:
First, we need to restore the tax credit for first-time home buyers. The sale figures from NAR plainly show that without the first-time credit the market remains profoundly weak.
Yes, restoring the tax credit will cost the government money in the form of reduced revenues but the reality is that you can’t have move-up buyers without hordes of first-time purchasers entering the market. The additional transactions represented by first-time buyers mean more tax revenues for local governments — and more money for local governments means fewer service reductions. Most importantly, real estate buyers purchase a lot of stuff from local merchants when they acquire a home and that’s good for everyone.
Second, we need to bring investors into the picture.
- Open loan modification programs to investors. When one of every four home sales nationwide is a foreclosure, the worth of all neighboring properties are devalued because buyers looking at comps see lower prices. As to who owned the distressed property — whether the past owners were investors or owner occupants — it doesn’t matter. The only fact which counts is that prices are objectively lower.
- Expand the Mortgage Forgiveness Debt Relief Act. It used to be that if a mortgage was not fully repaid the borrower would often receive a note from the IRS explaining that the unpaid debt was “imputed” income — taxable income. Sending a tax bill to a foreclosed or bankrupt homeowner was absurd, so in 2007 the forgiveness act was passed to end government claims for certain mortgage shortfalls. The catch is that the forgiveness act applies only to personal residences, not investment property. The law needs to be expanded so investors are also protected.
- Currently FHA-insured loans are available only to owner-occupants who purchase properties with one to four units and large multi-family investors. Small investors need not apply, a serious gap in the program. The FHA allow investors to buy lender properties with 10 percent down instead of the minimum 3.5 percent it requires for owner-occupants. This would help reduce foreclosure inventories while limiting FHA risk.
Mr. Dimon ought to speak up. As a leader of the banking community and as someone who led a bank which did not offer gobs of toxic loans, Mr. Dimon needs to use his pulpit in the lending community to seek a new view of investors. After all, who benefits if investors buy an increasing number of foreclosed properties from JPMorgan Chase? Well, yes, JPMorgan Chase but also every neighborhood and community where such properties are absorbed and removed from the marketplace.
Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site, OurBroker.com.