The Biden Administration proposed a series of actions yesterday intended to begin to address the country’s affordable housing problem. The proposal is a good start, and it’s encouraging to see the Administration paying attention to housing issues.
Unfortunately, the Administration paints investors as the culprits in the lack of inventory available to first-time buyers and communities of color, and several of its suggested remedies aim to make it harder for investors to buy properties:
- “First Look” programs, which give government agencies, non-profits and owner-occupants exclusive access to REO homes from Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) have been extended to 30 days
- The FHA is being asked to hit a target of 50% of the sale of non-performing loans (NPLs) to government agencies, non-profits and owner-occupants, up from about 10% today
- The FHA’s CWCOT program, which allows servicers to sell properties via online auction without first conveying the title to HUD is being modified to make it easier for owner-occupants to buy these properties
A few thoughts here:
First, none of these actions, unfortunately, will make much of a dent in terms of inventory. Collectively, Fannie, Freddie and the FHA have about 12,000 REO homes. And given how strong demand has been over the past few years, one might suspect that these are not 12,000 pristine, move-in ready gems or they probably would already have been sold. Even with the government’s foreclosure moratorium now lifted, it’s unlikely that we’ll see a huge increase in foreclosure activity, and even less likely that we’ll see a spike in REO inventory – far more likely that homeowners who default on their loans will be able to sell then (at a profit) prior to the foreclosure auction.
Second, putting NPLs in the hands of government agencies, non-profits and especially owner-occupants is a terrible idea. There are a number of firms who have done an excellent job buying these loans and working with the borrowers to get the loans to re-perform, preventing unnecessary foreclosures. None of the potential buyers mentioned above are likely to have the skill and processes necessary to do that. So is the Administration’s plan to have a non-profit foreclose on a borrower in order to add inventory back to the market? That can’t be the plan…can it?
The CWCOT scenario is similarly confusing. By implementing this approach – which spares the FHA, HUD, and by extension the U.S. taxpayer from going through the expense of finalizing the foreclosure, evicting the occupant, cleaning up the property, paying for repairs and maintenance, absorbing the cost of taxes and insurance, and paying for the sale of the property – FHA has saved taxpayers billions of dollars over the past few years. But the properties sold are much better suited for investors than for first-time buyers. Very often the properties are occupied, so the new owner has to handle an eviction. There are sometimes title issues, which can be costly to resolve. Very often there are other outstanding liens which become the responsibility of the new owner. And property conditions are, well, let’s say “unpredictable.” There are no inspections, no warranties, no disclosures…none of the usual protections afforded a buyer in a home sale. Investors factor these risks into their purchase decisions. Will first-time buyers know what they’re getting into? Should the government encourage them to take on these kinds of risks?
Investors, by the way, have proven to do a much better job than government agencies and non-profits at rehabbing these properties and getting them back on the market quickly, which actually adds to the inventory of homes for sale. Or the homes are offered as rental units, another scarce commodity today, as rental vacancy rates approach historically low levels.
Affordable housing is a legitimate – and growing – problem. And the Biden Administration does make some interesting suggestions about increasing the number of manufactured homes and affordable rental units, financing assistance, and working with state and local governments to modify zoning laws that choke off high density homebuilding.
But blaming the investor for today’s inventory problems isn’t fair, and more importantly isn’t accurate. And making it harder for investors to play their role in the housing ecosystem isn’t going to do anything to solve the country’s growing crisis in affordable housing.