The $25 billion mortgage settlement between five leading lenders and the attorneys general of most states is good news for a lot of people. But it isn’t going to fix the nation’s residential real estate mess.
That mess - millions of homeowners underwater on their mortgages, a stagnant residential sales market that lacks buyers and a clog of foreclosed property - can’t be cleaned up with any single plan or settlement.
Ideas that help restore a normal home sales market will have the greatest impact on the most people and - eventually - the entire economy. That’s why I am more intrigued by a very different real estate plan developing in Washington.
The federal agency that oversees Fannie Mae, Freddie Mac, and the Federal Housing Administration is experimenting with a strategy to attract large investors to buy portfolios of foreclosed homes and agree to rent them for a period of time.
In the pilot phase of that plan, Fannie Mae is offering pools of rental properties, vacant homes and bad loans with a focus on the areas of the country hardest hit by the real estate crisis. The initial transaction is expected soon.
A successful effort could do a lot to restore a normally functioning real estate market over time and that would help fix a lot of problems. Nothing is holding that market back more than an oppressive inventory of foreclosed property. And no owner of foreclosed property influences the market more than government-sponsored enterprises like Fannie Mae and Freddie Mac.
The combined portfolio of foreclosed properties available for sale by Fannie Mae, Freddie Mac, and the FHA amounted to 83,459 properties at the end of last year. That included 1,143 properties in Massachusetts. More is on the way.
Clearing that real estate faster is in nearly everyone’s interest. Creating more rental property in the process is a plus.
“I think that is a highly desirable program and hopefully those test markets will actually work out,’’ says Eric Rosengren, president of the Federal Reserve Bank of Boston. “My personal view is that [Fannie Mae and Freddie Mac] should be more focused on promoting a faster recovery in the housing market.’’
Details about the pilot program - the specific properties for sale and transaction terms - have not been disclosed. Qualified bidders were required to keep them confidential.
But when they do come out, some of those details may not be pretty. Buyers will be big investment firms and you will hear complaints about Wall Street returning to pick the bones of a crisis it helped create. The financing terms of these deals aren’t clear.
Most important, no one knows how much Fannie and Freddie will swallow when it comes to price. The political cost of eating losses can be high, at least in the short term.
“At times, that means they are going to be faced with a trade-off,’’ says Rosengren. “Should their primary focus be promoting a faster recovery in the housing market or limiting their exposure to additional risk or loss. The balance should be tilted toward recovery in the housing market.’’
That’s easy to say when you’re an economist spending someone else’s money. But anyone who followed the New England real estate market of the early 1990s is familiar with how this could work.
In those days, the Federal Deposit Insurance Corp. owned all kinds of real estate and other assets after waves of bank failures. The region’s real estate market was a mess.
The FDIC quickly decided to cut its losses, despite complaints that it was moving property at fire-sale prices. But that decision helped establish a floor in a terrible market, which slowly recovered from that low.
“I think it was a significant contributor to the recovery we had,’’ says Rosengren, who was then working at the Boston Fed and researching that real estate crisis. “They correctly observed that holding a large inventory of vacant homes would discourage anyone from buying. People became convinced the bottom had been hit and prices could go up.’’
Others are not so gung-ho on the current bulk sales plan. Elyse Cherry, chief executive of Boston Community Capital, says Fannie Mae and Freddie Mac hasn’t been accommodating to individual owners but could end up giving breaks to big investors. She also says the bulk-sale plan comes with no apparent standards for maintaining properties.
Our real estate problems are too big for any one solution. But new plans to speed up the sale of foreclosed property are worth the trade-offs.