Whenever I hear a new proposal to reduce foreclosure levels and raise home values my usual reaction is to duck. Experience has shown that “helpful” suggestions to save the housing market have an uncanny tendency to benefit whichever special-interest group is ultimately behind a given scheme.
Given this background, you can imagine my amazement when I came across several practical suggestions which could instantly impact the housing market — and for the better. The source of these ideas is Bruce Norris of The Norris Group in Riverside, Calif., a real estate investor and analyst.
Essentially what Norris wants to do is bring more investors into the marketplace, a concept favored here since the earth first began to cool. Given that real estate investors are people who want to buy houses, and given that we now have a gross surplus of unsold properties, there’s a certain inherent sense to any concept which encourages more real estate investment. What makes the Norris ideas stand out is that they could be implemented in an afternoon and impact the marketplace immediately.
For a country where a lot of people express a great and unfettered support for capitalism, we sure do a lot to inhibit real estate investors.
You can buy real estate with one to four units and finance with an FHA mortgage, but only if you live in one of the units. Pure investors do not have access to FHA-insured financing.
If you run into tough times and must sell your home through a short sale, any unpaid mortgage balance is untaxed. If an investment property is sold with a short-sale then the unpaid mortgage debt is regarded as taxable income. In effect, investors are penalized if the economy turns upside down.
Communities have higher property tax rates for properties owned by investors. The result is that two identical homes can have different tax bills if one is owned by an investor and the other is owner-occupied.
Investors are specifically banned from the government’s $75 billion mortgage modification plan. Only owner-occupants may participate.
“The absurdity here is that real estate investors are people who want to buy houses and right now we have a huge inventory of unsold homes,” says James J. Saccacio, chief executive officer at RealtyTrac.com, the leading online marketplace for foreclosure properties and data. “That inventory pushes down home values — including the value of your home and mine. The one sure way to raise property values is to have more buyers and less inventory, goals which could be readily accomplished if we encouraged more property investments.”
Added Saccacio: “Think about it this way, imagine that a home down the street is foreclosed. Does the value of your home go up or down? Does it matter if the foreclosed house was owned by the occupant or by an investor? Discriminating against real estate investors is self-defeating; it’s not the way to restore the housing market.”
We too-often describe investors as “speculators” and imply that buying investment real estate is somehow less worthy than buying stock or bonds.
For example, last year our then-Secretary of the Treasury, Henry Paulson, explained that “as our economy works through this difficult period, we will look for additional opportunities to try to avoid preventable foreclosures. However, none of these efforts are a silver bullet that will undo the excesses of the past years, nor are they designed to bail out real estate speculators or those who committed fraud during the mortgage process. These efforts are to help American families who both want to and can, through a loan modification or re-financing, stay in their homes.”
Translation: Investors are not American families and they may well be crooks. They are the “other” and not like you and I.
Paulson, of course, is the former head of Goldman Sachs, a company not known for discouraging either speculation or excess.
Mr. Norris has four ideas to bring investors back into the real estate marketplace, each of which merits serious consideration.
1. Increase the number of loans made available to well capitalized investors. In other words, expand Fannie and Freddie loan programs from a maximum of 10 loans per investor to an unlimited number of loans for qualified investors.
The cap on real estate loans has never made much sense. Under the current rules you can have 10 properties with ten loans and a total of ten units. You can also have 10 properties with ten loans and 40 units. How is this more risky then having 12 mortgaged properties with 12 units?
The standard should not concern how many loans you have, but whether you’re financially qualified. If your loans are being paid in full and on time why should anyone care if you have 10 houses or 20? No stockbroker will deny a margin loan because someone wants to purchase 200 shares rather than 100.
If we have investors who want to buy more houses, and if they can make their payments, then bless their hearts we ought to encourage every purchase they want to make. If the unlimited cap suggested by Norris is regarded as too risky, then how about raising the cap to 15 properties or 20 properties?
2. Make the 203K FHA loan program available to investors. The 203K program is a real estate rehab loan which allows buyers to first acquire an existing property and to then make repairs and improvements. The attraction of the program is that both the acquisition and improvements are funded up-front with a single mortgage, thus eliminating the cost to refinance or get a second loan.
It was back in October 1996 that HUD banned investors from the 203K program. The ban was supposed to be a temporary “moratorium” which would “allow the Department to consult with the industry and affected communities to explore legislative and policy reforms that will result in a program which will provide the neighborhood rehabilitation benefits of the investor program without the abuse and risk to the insurance fund.”
Thirteen years later as nearly as anyone can tell HUD is still consulting, which is unfortunate because the 203K program would allow a lot of entry-level investors to purchase and improve homes. In effect, opening the 203K program to investors would not only reduce the inventory of unsold residences, it would also improve neighborhood housing stocks thus allowing local communities to increase property tax revenues.
3. Eliminate the 90-day waiting period before a repaired property can be sold to a buyer using an FHA loan. Since 2003 HUD has had a prohibition on property flipping. The concept has been that quickly buying and selling a home by itself constitutes “flipping” and flipping by its nature is nefarious and evil. Of course, if you buy stock in the morning and sell the next day, that’s okay.
In basic terms, the rule works like this:
FHA financing is unavailable for homes re-sold within 90 days.
If a home is re-sold within six months the FHA can require a second appraisal.
For a home re-sold within a year HUD can require additional paperwork.
The date of sale is defined as the date of closing, not the date of recordation.
In 2007 HUD determined that the anti-flipping rule should not apply to properties sold by Fannie Mae and Freddie Mac, properties acquired by inheritance, properties sold by non-profit groups or governmental agencies, or properties located in presidentially-declared disaster areas.
In 2008, HUD changed the anti-flipping rule again, saying that it did not apply to foreclosed properties sold by lenders.
What really remains of the anti-flipping rule is this: Lawful investors are penalized for quickly and efficiently refurbishing homes.
If HUD is worried about illegal flipping which often involves fake repairs, fraudulent closings and predatory loans, then it ought to take steps to limit those particular activities rather than merely buying and selling property with speed. Requiring two appraisals for homes sold in less than six months should resolve the problem.
4. Allow loans to be taken over by credit-qualified new buyers with no down payment.
Norris says “through this process, which was successfully used in the 1980s, new buyers simply step in and take over the loan payments. The only stipulation is that the loan has to be made current at the close of escrow. The U.S. currently has about one million owners who will not be capable of keeping their homes without a huge discount on the principle balance. Many of these properties have fixed rates at very favorable rates. Allowing willing and capable buyers to come in and take over these loans would help contain the spread of foreclosures across the country.”
In this case an investor can buy a property for the outstanding loan balance. Lenders and mortgage insurers ought to love this approach because it’s better for them than a short sale and losses.
The practical problem is that many foreclosed properties are upside down, the value of the property is less than the remaining mortgage balance. In essence, then, the idea would be to trade “no money down” for ownership, meaning that in many cases the down payment would actually exist in the form of an above-market price for the property. While this approach would not work for many investors, it could be attractive for those able to rent the property for enough to cover most or all costs and who see rising values ahead.
All in all, Norris has four reasonable, practical, credible ideas. That’s not bad, especially in a marketplace which needs investors — and needs them now.