Roughly three in 10 homes in the United States are now worth less than the mortgages on those homes. There is a continuing cycle of homeowners walking away from their mortgages, driving down home prices and causing other homeowners to abandon their mortgages.
There are potential fixes to housing that do not require new federal stimulus measures but merely require that present programs, policies and attitudes be tweaked.
The sledgehammer we have been taking to the housing market to prevent mortgage fraud needs to be replaced with a scalpel because the former approach is depressing the recovery of the housing market.
First, in combating mortgage fraud, a bias has developed in federal loan programs against investors that must be eliminated. Under the federal Home Affordable Foreclosure Alternative, investors must hold their newly purchased homes for six months before they can be resold. Fannie Mae will not permit investors to receive additional financing once they have purchased 10 homes. Lenders and private mortgage insurers will not finance or insure buyers who want to pay more for a house than what the investor paid in the previous three to six months.
Rather than looking at investors as vultures or potential mortgage fraudsters, an attitudinal shift needs to occur where they are embraced as the potential saviors of the housing market that they are. Until investors start making money in housing, and lots of it, there will be no recovery in the housing market. This will only occur when disincentives to invest are eliminated. Like in any other market, when fear is replaced with greed, housing inventory will decline, prices will rise and a sense of urgency to buy will be restored to the market.
While mortgage fraud is a legitimate concern, it should be addressed through closer scrutiny of borrowers rather than by imposing a brake on the rise of home prices.
Second, let’s make it easier for defaulting homeowners to remain in their homes as renters. Now, defaulting homeowners may not remain in their homes after they have been sold to a third party in a short sale transaction or conveyed back to the lender through a deed in lieu of foreclosure.
Rather than punishing defaulting owners, why not encourage them to stay as renters? There are two good reasons for this. First, it makes foreclosed homes potentially more desirable to investors if the house comes with a tenant who can pay rent based on a reset value of a home. Second, encouraging defaulting owners to remain in place as tenants will prevent the community destabilization that will inevitably occur if millions of former homeowners are otherwise displaced from their homes.
Third, let’s eliminate the governmental bias against condominiums and accord them the same status as single-family homes. At present, FNMA will effectively not buy mortgages in complexes where more than 15 percent of the owners are delinquent in paying their association fees or where more than 49 percent of the units are leased. Reaching these limits is, therefore, a financial death sentence for existing condominium communities, depressing prices further in these communities.
As a result, most condominium associations have adopted leasing restrictions more severe than the FHA or FNMA requirements to give themselves some margin of error. For two reasons, these policies have resulted in more condominium units being foreclosed upon than single-family homes.
First, owners have no choice but to allow their homes to go into foreclosure if they cannot either sell or lease them. Second, if a condominium association reaches the 15 percent delinquency rate threshold and mortgage money disappears, a downward spiral of home values is almost guaranteed. Another challenge in this area is that standing condominium inventory in new condominium projects cannot be sold until 50 percent of the units in the project have been pre-sold. This requirement has caused the needless foreclosure of literally thousands of projects that would have been viable had financing for incremental unit sales been available. In a world where higher density housing should be encouraged as part of a more sustainable lifestyle, it is ironic that our government’s housing policies actually create disincentives to own multifamily housing.
Fourth, loosen up on appraisal standards. Every Realtor still in the business will tell you that he or she has worked on countless bona fide real estate transactions that fell apart because an appraiser said that the sales price was too high. In markets where prices are falling and there are few or no comparable home sales, or the comparables are mostly foreclosures, good (and valuable) homes end up getting clobbered by low appraisals.
However, the current appraisal system artificially depresses market prices by not allowing for the natural rise of home prices absent a comparable home sale. If appraisal standards were rewritten to be slightly more flexible and replaced with closer scrutiny being given to persons buying homes, this problem could easily be resolved.
Government often focuses on yesterday’s problems to the detriment of today’s challenges. Our single-minded focus on weeding out mortgage fraud is sadly slowing our housing market from rebounding.
Seth G. Weissman is an Atlanta real estate lawyer and adjunct professor of city planning at the Georgia Institute of Technology.
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