Investors Vs. Housing Finance Reform

boxer Last week the Senate Banking Committee continued the arduous task of sifting through a mountain of ideas related to reforming the U.S. housing finance system.

This week the subject concerns injecting additional private money into the current system.

Before providing details on the content of the hearing, it’s important to put this into context for residential investors...

As a lobbyist fighting on your behalf, I am heavily involved in the housing reform debate precisely because of the massive impact it can and likely will have on small, non-institutional investors. While Fannie and Freddie created a beneficial framework for inexpensive mortgages, the implicit taxpayer guarantee that resulted in their bailout drives the calls for reform.

Since the housing crisis, Fannie and Freddie have not been particularly kind to non-institutional residential real estate investors. My website documents the many concerns we’ve had with them over the past three years. While many of those issues were resolved (or partially resolved), we understand there is a significant amount of work left on the table.

Hitting Close to Home

Housing finance reform directly relates to our work for investors, and investors’ future business prospects, because the outcome of the reform debate will decide the size and scope of Fannie and Freddie in the “to be determined” market. Effective reform will result in properly functioning enterprises, but will prevent them from establishing national housing policy by fiat or influencing the outcome of national elections.

As an aside, I recently received a letter from the Federal Housing Finance Agency (FHFA), the governmental agency with oversight of Fannie and Freddie, in response to a series of questions regarding (i) short sale and REO valuation methodology and (ii) flipping restrictions. I worked with FHFA last year to reduce flipping restrictions imposed by Fannie and Freddie and to reform the valuation methodology for distressed properties.

Until Congress acts and a permanent director of FHFA is put in place, I don’t think there will be any dramatic reforms on either issue. FHFA’s Congressional mandate is to get as much money as possible for Fannie and Freddie’s distressed assets. While it is clear to me they are not applying the new and reasonable methodology, they simply argue that the closer to retail value they can get for a distressed property, the better job they are doing. Here’s an excerpt from the letter:

“FHFA agrees that it is critical to ensure that distressed property dispositions are appropriately priced. Fannie Mae and Freddie Mac (the Enterprises) engaged many stakeholders in discussion about the issues you raise, and as a result, have enhanced their valuation process to adapt to the rapidly changing market. The goal is to achieve fair market value for short sales and REO properties, thereby improving recoveries for the Enterprises and taxpayers, and stabilizing home values.”

I will continue to seek relief for small investors on both the valuation issue and the remaining flipping restrictions.

Some Agreement…But To What End?

Most participants in the recent Senate hearing (and other hearings as well) seem to be in agreement on three general concepts:

There is a need to increase private capital in the housing market
The affordability of mortgage loans must be preserved
Taxpayer risk must be reduced

Those three concepts can lead Congress two ways. On one hand, they could lead Congress to a deal that injects more private capital and increases guarantee fees thus reducing taxpayer risk, while maintaining an explicit guarantee for certain loans thus maintaining affordability. On the other hand, the three concepts could lead Congress on an endless trip of circular logic, because in theory each concept can nullify the next.

Included among the ideas discussed at the hearings was a complete privatization of the jumbo loan market (loans in excess of $417,000). The privatization could be staggered, starting with higher cost loans and moving toward the $417,000 number – and even below that if the results of the privatization support it. Experts also pitched a concept of shared private/GSE risk in the conforming loan market, an increase in g-fees as a ration to the risk of the mortgages added to GSE portfolios, and the creation of an explicit taxpayer guarantee rather than the prior “implicit” guarantee that existed prior to the crisis.

Where We Stand Right Now

Hundreds of organized stakeholders will weigh-in on housing finance reform during the Congressional debates. Whether this will result in meaningful reform or paralysis through analysis is still too early to call. I will continue to lobby the issue and provide articles updating interested parties on the progress, or lack thereof, Congress is making on the issue.