Last week I interviewed an investor who buys foreclosed properties and rents them out long-term for solid returns. He claims that's the only way to right the housing market — get long-term investors to eat up the excess inventory. The biggest roadblock, however, is credit. Fannie Mae and Freddie Mac both limit the number of investor mortgages.
Multiple sources now tell me that the Administration, specifically over at the Department of Housing and Urban Development, is considering ways to get more investors into the housing market, possibly with the help of Fannie and Freddie. HUD would not confirm that, but Fannie Mae's chief economist Doug Duncan said it is definitely on the table both at HUD and at Fannie.
"We're certainly exploring the opportunities to expand that," said Duncan in an interview, cautioning, "the data in our own portfolio show that when you get to a certain number, like ten is the number we've chosen, if there's any default issue, all the loans go bad at the same time, so at the present time we have two mandates, one is to help provide liquidity and help with funding, but the second is to protect taxpayers as well."
No question that any such program would have to require investors to have significant skin in the game, that is, large down payments on all properties, and perhaps a designated capital reserve level to protect against losses. Underwriting would have to be stringent, unlike what went on in the heyday of the housing boom.
Part of the problem is that the Administration doesn't want to spend any more money on housing, and it is particularly politically unpalatable to offer financial assistance to investors, who are widely blamed for causing the housing crisis in the first place. But we're talking about a different kind of investor here. There is an awful lot of hedge fund capital just sitting on the sidelines, if and only if the banks would let them on the field.
With home prices falling yet again, a collective $1.7 trillion of collective home equity lost in 2010, according to Zillow.com, and mortgage rates rising, more potential home buyers are being priced out of the housing market. 23 percent of borrowers are now underwater on their mortgages, which means they can't sell to move up. Inventories are still far above a healthy level, and the shadow inventory of foreclosed properties will only add pressure to prices. I'm sure the Administration is well aware of all that, which is why officials are putting ever more pressure on Fannie and Freddie to write down mortgage principal.
"The Administration believes strongly that the FHA short refi [which involves principal write-down] is a viable option to deal with borrowers with negative equity, and outright refusal to implement a program which could have economic value to the institutions bearing the risk, we think is shortsighted," FHA commissioner David Stevens told me.
Whether it's principal write-down or investor incentives, it is becoming ever more abundantly clear that the housing market is not going to right itself on its own without considerably more pain.