By Gary R. Prince
Here’s a radical idea to ease the housing squeeze and alleviate the credit freeze now hammering the economy: Let the pros, not the pols, solve it quickly, beneficially and efficiently by allowing experienced real estate investors to do what they do best,buy, refurbish, resell and manage more homes.
All it would take is a new source of credit from Fannie Mae and Freddie Mac.
Congress should authorize these two government-sponsored, publicly traded companies in the mortgage finance business to purchase new mortgages directly from experienced professional real estate investors. If these professionals had a dependable source of market-rate financing, they could buy existing foreclosed houses, refurbish these neglected properties and create affordable housing for people by either selling or renting the houses.
This program would speed the finding of true market prices. Right now, many housing markets are in near freefall. Buyers are sitting on the sidelines because they expect that next month’s prices will be lower than this month’s (and they have been right). Millions of homes face foreclosure,nearly one in every 200 is now threatened. Big financial institutions are still reporting eye-popping losses, and housing prices continue to shrink as the amount of new and used homes increases. A number of measures have been floated to try to reverse the trend,mortgage-reset moratoriums, new subsidized financing packages, fresh community development funds,but none seems likely to save homeowners now.
Since August 2007 real estate financing has resembled the shoreline of the Arctic Ocean at the onset of winter,more credit lines freezing as banks find no buyers for the mortgages they are writing, even for creditworthy clients. Few if any of the major investment banks, large pension funds or other financial institutions now want to buy mortgage-based securities for fear they will get stuck with more bad loans, unsellable houses and large losses.
But if the government housing agencies were financing professional buyers, the market dynamic would change dramatically. The banks, knowing that a number of serious buyers now have financing, would not be tempted to dump housing on the market. Buyers, knowing that banks desperately want to get foreclosed houses off their balance sheets, could bargain for the best prices. The result would be a process that would soon determine the true market value of housing.
Properties that today are vacant, vandalized or illegally occupied would be absorbed into the traditional housing market. Real estate pros would buy and refurbish houses only at prices that would allow them to resell the properties to people who qualify for mortgages purchased by the government lenders. As foreclosed houses are sold and occupied by their new owners, neighborhoods would stabilize, law enforcement and public health problems would ease, the hardest hit areas again would be populated by neighbors, rather than by squatters or transients.
Who should be eligible to sell mortgages directly to the government agencies under this program? The long-time real estate professionals who have 15 years or more of experience and who own 50 or more housing units: single-family homes, condominiums or apartment buildings. I estimate that more than 10,000 real estate professionals meet these criteria and are capable of implementing this program. Make market-rate credit available to them to purchase homes suffering with subprime or delinquent mortgages and more than 500,000 housing units could be removed from the distressed inventory in a matter of months.
Would the real estate pros benefit from this proposal? Of course. They are in business to make money from buying, selling and managing housing. But the U.S. economy would get a big boost as well, and that’s the whole point. A partial thawing of the current credit freeze would unleash market forces that traditionally make real estate an attractive investment for individuals as well as large institutions.
In short, after a decade of bubble-induced craziness, the residential real estate market could be returned to historic normalcy and sustainable growth quickly and at minimal cost and risk.
Prince has a real estate consulting and financial affairs office in Cypress.
