Coming Soon to Your Hard-Hit Neighborhood: Government-Subsidized TBTF Slumlords

I’m all in favor of creative ways to solve the foreclosure crisis. But I don’t think this is answer.

The government is soliciting ideas for ways to unload lots–big lots–of foreclosed properties currently owned by Fannie, Freddie, or FHA.

The Federal Housing Finance Agency (FHFA), in consultation with the U.S. Department of the Treasury and Department of Housing and Urban Development (HUD), has announced a Request For Information (RFI), seeking input on new options for selling single-family real estate owned (REO) properties held by Fannie Mae and Freddie Mac (the Enterprises), and the Federal Housing Administration (FHA).

The RFI’s objective is to help address current and future REO inventory. It will explore alternatives for maximizing value to taxpayers and increasing private investment in the housing market, including approaches that support rental and affordable housing needs.

“While the Enterprises will continue to market individual REO properties for sale, FHFA and the Enterprises seek input on possible pooling of REO properties in situations where such pooling, combined with private management, may reduce Enterprise credit losses and help stabilize neighborhoods and home values,” said FHFA Acting Director Edward J. DeMarco. “Partnerships involving Enterprise properties may reduce taxpayer losses and meet the Enterprises’ responsibility to bring stability and liquidity to housing markets. We seek input on these important questions.”

Kevin Drum rightly wonders what the point of this is, given that investors can already buy as many REOs as they want.

The point is volume: basically, the government would share ownership of the houses for such time as it takes the new owner to make them profitable again. And in exchange, the investor would be able to buy a bunch more houses.

The idea is to facilitate investors buying up whole chunks of homes in a particular market.

the agencies look forward to responses from market participants that have the technical and financial capability to engage in large-scale transactions with the Enterprises and/or FHA involving the disposition of REO.
A specific goal is to solicit ideas from market participants that would maximize the economic value that may arise from pooling the single-family REO properties in specified geographic areas. Under the management of a third-party, a joint venture or some other structure may respond to local economic and real estate conditions more effectively than individual sales. For instance, there may be certain metropolitan areas (or some narrower geographic designation) with a substantial number of REO properties and a strong rental market. In such locales economic value in REO disposition may be enhanced (and real estate markets begin to be stabilized) by turning a large number of REO properties into rental housing.

Call me crazy, but it seems the only reason such a program would be lucrative would be because it allowed one investor to corner significant chunks of the housing or rental market in a given city or neighborhood. Which, it would seem to me, would make for really abusive landlords: people with no competitive need to keep up their properties, with market dominance sufficient to raise rents beyond what the economy really supported, and enough pull at city hall to avoid accountability for doing these things.

Now, Jared Bernstein says we shouldn’t worry about using government subsidies to create TBTF slumlords.

I’ve heard two arguments against the idea.

[snip]

Second, investors buying foreclosed properties in bulk make lousy landlords.  It’s a valid concern, but there’s a policy wrinkle in the FHFA/admin’s plan that should help: the proposal—the RFI noted above—should include requirements regarding property management and the Feds should reject proposals that aren’t convincing in that regard.

But really, the language purportedly protecting against TBTF slumlords is flaccid. It lists “address[ing] property repair and rehabilitation needs” as one of six objectives (after, it must be said, “reduc[ing] REO portfolios … in a cost-effective manner” and “reduc[ing] average loan loss severities.” It requires private partners take on “most or all day to day management and operations, including property maintenance and rehabilitation, rental property management, marketing for sale.” And it only requires proposed plans to address, “steps taken to ensure that the properties are well maintained and managed during the period” as item 7, after already emphasizing, as item 2, “a focus on maximizing returns.” Nowhere does it require these hypothetical landlords to charge reasonable rates for rents.

In other words, while this plan may include lip service to the upkeep of these properties, nowhere does it limit what kind of price gouging these TBTF landlords could engage in (indeed, it places more emphasis on financial return than on societal return).

And of course, as happens with most of these Third Way public-private partnerships (cf. health care reform and the Wall Street bailout), it deals away key enforcement mechanisms precisely by helping corporations avoid market forces and encouraging them to become so big they can’t be held to account.

Ultimately, this seems to be an effort to find a shortcut out of the housing crisis by engaging in more corporate subsidies. Plus, it’ll take several months to put the program together, whereas offering subsidies to everyone right now might be faster with less market-distorting effect.

If the government is going to be subsidizing turning these properties around anyway, why not subsidize the average people that have gotten so screwed over by TBTF corporations in the first place? Why not subsidize the people who create stable communities–actual community members–rather than asking corporations to restore communities? Why struggle again to limit market forces in a such a way that only the big boys benefit?

I know Obama likes to claim, falsely, that government can’t create jobs, and because of that claim he believes all government help must be laundered through corporations. But corporations can’t create communities, which is really what’s called for here.

image_print
21 replies
  1. prostratedragon says:

    Land assembly, dammit!!!

    (Not shouting at you, EW, you obviously get the whole thing. But so much of this has taken place to the denial of many of the victims, or their so-called leaders, and now here we are, where I doubt it will be deniable by any but the insane for much longer.)

    That has been the other point of this sordid crime all along, besides massive fleecing of middle class assets and earning power. It makes sense that the capital of the thing has been shifting to Chicago, where the machine and its silent backers have been at this since maybe the mid-1930s.

  2. emptywheel says:

    @prostratedragon: Right, each day we’re seeing another settlement for reverse red-lining.

    Yet the solution is now to put another corporation in there to try to recreate the neighborhoods gutted by previous corporations? Really?

    Why not let the communities so victimized have access to low-interest loans to make these homes available?

  3. scribe says:

    You’re doubtless overlooking some of the fine print (which may not yet have been disclosed) which will doubtless exempt (through federal pre-emption) these slumlords from state laws governing residential landlord-tenant relationships, not the least of which were protections against predatory landlord behavior, minimum standards, covenants of quiet enjoyment, and all the rest.

    I’ve been saying for years now that this housing crisis has been and is land reform in reverse, and this is just another step. Run the campesinos off their land and take it, then rent it back to them.

  4. sojourner says:

    Sitting and watching all of this, it is like an enormous game of Monopoly — but there is no longer any competition involved. It is all about just giving in to corporate interests to make more and more money.

    I just have to wonder what will happen when the corporate interests begin to eat themselves because they have sucked the middle class dry…

  5. Cregan says:

    I don’t enough about the details of this program, but if it can help, then letting a few rotten apples benefit shouldn’t stop it helping the thousands.

    This, of course, is the problem with government doing any of these sorts of things. To prevent fraud, these activities have to be specified in such detail that, 1. they can’t cover every possible situation, 2. they straight jacket those with some honest intention trying to solve a problem.

    You wind up with ineffective programs that STILL have fraud and benefit few.

  6. Rpm says:

    Generally most of these homes are in rough condition and need major repair and in many cases it exceeds there current and probably future value. Even in above average economic areas in Northern Calif homes built back in the 60’s thru 80’s need, new roof, heater,air, etc, maybe 50K to 80K on average. The problem is that most families do not have the cash for such repairs and when you add these costs to the proposed base cost of the home it doesn’t make economic sense to borrow the money and do the fix up. Keep in mind that at least in Calif and many bubble states
    housing prices will keep falling for years, I know not a popular idea so the bottom line is that these homes generally are not something that citizens with limited budgets should consider buying. We shall see if this program has legs I doubt experienced home investors will get into this program unless the homes are very very cheap and even then a deflationary housing market longterm is not positive for investors.

  7. posaune says:

    @prostratedragon:

    Land Grab is right.

    Now we get to witness Round III of the (intentionally engineered) great housing bust. In which the insider REITs (already incorporated, btw) engage in recycle speculation. Watch for collaboration with credit ratings, new “tenant” legislation and “subprime leasing.”

  8. emptywheel says:

    @Rpm: I think you forget (or not aware) that I’m in MI, another of the states most hard hit by the housing crash.

    I think your comment that the houses are in that bad of shape overstates thing (the stock in MI is surely older and more weather beaten than that in CA).

    But that said, you’re assuming that what is keeping real people from these homes is the admittedly unaffordable price of a tear off roof. I’m saying there are plenty of people and/or community orgs who could front that, w/o having to consolidate their markets into a monopoly.

  9. Rpm says:

    @emptywheel:

    I am also implying that owning a home is expensive, taxes, maintenance, insurance, interest payments require good paying jobs that offer reasonable job security before taking on large debts. The current trends do not favor lower and middle class families taking on large debts unless they have a rich uncle!

  10. P J Evans says:

    Then you have the existing RE corps (‘management companies’ for those who live in their properties), some of whom are only about one step up from slumlords now.

    The complex I used to live in was, when I moved in, owned by and entertainment lawyer who was using it as a tax loss – but it was decently maintained. He couldn’t get it refi’d (this was about 1999, don’t know what he was doing or who he was) so it was under a receiver for several months before being bought by a RE company that mostly owned business property. (Still fairly decently maintained, good manager.) They sold the place to a bigger management company that has a lot of high-density residential. Bad move: they got rid of the live-in manager, the live-in maintenance guys, cut maintenance to the bone, and started making it into a bad place to live. (I think they had five non-resident managers in six months, and good luck getting them to keep appointments with tenants.)

  11. Cregan says:

    @emptywheel:

    All of these things are like squeezing a balloon. It narrows the balloon here, but makes it bigger there.

    You would think that we learned the lesson well enough with the environment and nature. When you intervene in some way you think is helpful, it causes other ramifications that are not so good. There are ALWAYS unintended ripple effects.

  12. Rpm says:

    @emptywheel:

    In my original post I made it clear that I didn’t think this idea would get much interest from the investor side. The basic reason is that we are in for a very long run of RE deflation so buying into housing today and selling in the future doesn’t make for big profits, also employment trends would indicate that rents levels will come under stress sooner or later.

  13. JohnJ says:

    We have been stuck in a motel room for over a year now because the rents in this area on anything but 1 BR apartments have not gone down AT ALL.

    I can go in any direction and find 1 out of 5 to one out of 10 houses with a for rent sign out front. The rents are at exactly the same level as they were before the crash! Some of these places have been vacant for over 2 years.

    I don’t mind when someone is renting grandma’s fully paid for house to get her some income for the old folks home, but most of these owners are ex-flippers and rent suckers. They want a full anti-eviction/credit background check, a month’s security deposit, and first and last rent or the house will stay empty for years. This works against us since the last place we rented evicted us AFTER we moved out. Not a judgement since there was no lease, but an eviction to put us into the blacklist system (done by an ambulance chaser owner from New England).

    We also have a big problem down here with people renting out homes that they never owned, just found empty. Then there is a new scam where a few lawyers have been convincing homeowners associations to foreclose over missed dues, auction the home for a few thousand which the “buyer” (in some cases the same lawyer that is driving the foreclosure for the HOA) immediately rents out, until the bank comes in and throws the renter out without notice because they never got the mortgage paid.

    These “people” are the ones that will be first in line for any Government program to get homes on the rental market.

    (Fair disclosure: this is Florida where scammers like Jeb or Rick Scott actually take turns owning the government.)

  14. Rpm says:

    The government MAY own millions of homes before this financial crisis ends, sounds crazy but the banks are dumping whatever they can back onto the government via refi activity and just try and find a bank that would actually hold a mortgage note today, very rare! This latest call by Fannie is a smoke screen since they have had endless discussions with major investors for bulk transactions but have had very little interest! Homeownership in America has been a giant ponzi scheme that represents magical thinking. Housing and homeownership are not the same and should not be confused!

    Enjoy reading your blog and appreciate your effort to educate us on many of these topics.

  15. emptywheel says:

    @Rpm: Agree–the numbers are huge.

    But I just worry that the Admin will then decide it has to go huge to unload it quickly, when going to smaller, more local agencies/corps will work better and maintain some competition/responsiveness in the market.

Comments are closed.