(NOTE: Want to learn how to flip houses to hedge funds? Click here for our “Partnering With Hedge Funds” special report.)
Hearings and informal roundtables on reforming the U.S. housing market have started in Washington, but it’ still too early to tell whether substantial reform will take place.
Our organization, the Distressed Property Coalition (DPC), is preparing a submission to Congress as well as a series of meetings in May and June in order to discuss reform efforts that will most benefit residential investors.
Prior to our involvement, the residential investing industry absorbed a number of hits from government-sponsored enterprises (GSEs) – Fannie Mae and Freddie Mac, specifically – that made it harder to buy and sell houses. As we begin to work on a housing reform briefing for Congress, we view much of this process with a heightened sensitivity to the damage that non-elected individuals can impose on our industry.
Furthermore, we are equally concerned with the power that non-elected individuals can sway over housing policy matters in general.
Our Upcoming Proposals
The root causes of the housing crisis remain fresh in our minds, but unfortunately some policy makers wish to pretend the crisis never happened, and are intent on repeating the same behavior that led to the housing crash. While a crash in any market presents opportunities, we are seeking policies that contribute to a relatively stable housing market, and more broadly a stable economy.
With that in mind, we have identified three initial policy positions we believe will protect investors and support a free market:
-
GSEs are unqualified to influence national housing policies.
-
GSEs lack the necessary accountability to influence national housing policies.
-
The benefits of affordable mortgages must be balanced with the cost of taxpayer support.
The first two policies deal directly with Fannie and Freddie, or whatever entities ultimately replace them. Given the benefits of cheap mortgage loans these types of entities provide, it is not realistic to believe the government will abandon the housing market altogether. But given the massive competitive advantage that accompanies the backing of the government, it begs two questions:
Should GSEs also get to make national housing policy?
And should GSEs be involved in politics, specifically lobbying and campaign work?
On the issue of whether the GSEs should make national housing policy, we believe the evidence suggests an unequivocal “no.” Since the housing crisis, Fannie and Freddie have been the architects of such ingenious policies as:
-
Trying to equate flipping a short sale with “mortgage fraud”
-
Discouraging quick responses to short sale offers
-
Restricting resales of certain REO properties
-
Restricting resales of certain short sale properties
-
Applying profit caps to certain REO resales
-
Applying profit caps to certain short sale resales
-
Forcing buyers to sign legally ambiguous affidavits exposing them to legal action
-
Abusing their anti-fraud exclusionary lists for business purposes
-
Abusing a new REO and short sale valuation methodology to inflate the value of its assets
Not only are Fannie and Freddie not qualified to make housing policy, we believe it is also inappropriate for them to do so. When unelected individuals at undemocratic institutions implement national housing policy by fiat, there is no immediate recourse to address the problem. We spent nearly two years fixing (or at least improving) the litany of mistakes provided in the above paragraph. National housing policy is the job of elected officials, because if the policies are bad, we can elect new leaders. Accountability is a requirement to making national policy.
Before the housing crisis, Fannie and Freddie were possibly the most powerful institutions in Washington. Why did efforts to reform them prior to the crisis fail? Because Fannie and Freddie had possibly the most powerful army of lobbyists assembled in Washington, and they played a major role in political campaigns. In short, if a member of Congress challenged Fannie and Freddie, they would try to replace the member with a candidate who would support their agenda.
“The right to petition the government is guaranteed.” As a lobbyist, this is my short answer whenever I am asked why I have the right to do what I do. Industries use a lobbyist because it is a lot easier to understand one person speaking on behalf of 100,000 people than everybody talking at the same time.
However, GSEs enjoy the greatest gift of all: government backing. What else could a lobbyist possibly achieve for them that they are not already given? Fannie and Freddie’s lobbying and campaign efforts were a protection racket supported by taxpayers. The best way to protect investors and taxpayers from incompetent and overzealous GSEs is to eliminate their right to lobby or influence elections.
Striking A Better Balance
Finally, there is the matter of mortgage affordability and taxpayer protection.
An undeniable value of the role of Fannie and Freddie in the housing market is the affordability of mortgage loans, and specifically the 30-year fixed rate mortgage, which serves as the primary product for Americans purchasing a new home. The risk associated with this product for taxpayers, the GSEs and lenders is low in comparison to the alternative loan products developed over the years aimed at less credit-worthy individuals. No down payment loans, down-payment assistance loans, no documentation loans, and variable rate loans have all dramatically raised the risk profile for the GSEs, banks and the taxpayers ultimately guaranteeing the loans.
While the pre-crisis housing model worked for many decades, the housing collapse serves as a harsh lesson that the pre-crisis model is untenable for taxpayers. Congress faces a difficult decision in creating a cost-benefit model balancing the benefits of affordable mortgages with the cost of taxpayer support and the broader consequences a massive bailout has on the economy.
Our position is that GSEs cannot be the beneficiaries of any taxpayer guarantee if effectuating the guarantee results in an economic recession. The taxpayer exposure must be reduced, which means Congress will have to tighten standards on what types of loans the GSEs can purchase and guarantee, and make it more expensive for the GSEs to operate.
John Grant
is the president of the Distressed Property Coalition, a private advocacy effort formed by the top leaders in the residential real estate industry, and dedicated to private market solutions, smaller government, and protecting taxpayers. DPC exists because investors deserve an easier path to buy and sell houses. Investors deserve to shape policies that govern them, not to be subjected to them. Investors deserve better information on current laws and policies. Investors deserve a safe environment to learn more about the industry. DPC is dedicated to providing these services to the residential real estate community. Their content and track record of success in Washington are unprecedented for this industry.
To received Mr. Grant’s policy briefings and newsletter, please visit www.distressedpropertycoalition.com