Distressed Property And Eminent Domain I...

news The Federal Housing Finance Agency (FHFA) – the government agency overseeing the conservatorship of Fannie and Freddie – released a report this month analyzing the impact of distressed property sales on FHFA’s Home Price Index (HPI).

While the report does not call for any immediate policy changes, it does contain several important facts bolstering the arguments we have made to FHFA and Congress for the past several years.

The study examines distressed sales within the state of Florida, and future studies may take a broader view of the market.

Here are several conclusions that can be reasonably drawn from the study:

Distressed property sales do not have a long-term negative impact on HPI. While initial discounts obviously lower HPI, the resale values are substantial enough for HPI to recover quickly. This dispels the myth that distressed sales have a lingering negative effect on the long-term values of homes.
Discounts for distressed properties generally fall into the range of 10%-30%. We believe getting this fact on the record through an independent study is critical to passing future positive reforms for investors. The facts demonstrate the discount is too prevalent to be simply a function of a “stigma” as argued in the past by the GSEs, but rather a function of the housing market. In other words, discounts are not “suspicious” or a sign of alleged “fraud”, but part of the recovery process.
Fannie and Freddie will likely push back against this study, and we plan to submit comments on this study and offer input on future studies. Despite setting the price for distressed properties, Fannie and Freddie have long argued that they are not getting fair value. But this study demonstrates there is a logical flaw in their argument. Statistically, there cannot only be errors at one end of the spectrum, meaning valuation errors cannot only result in properties being undervalued. If errors occur on one end, they must occur on the other end as well.
The data collected does include purchases made by institutional buyers, purchases we believe were inflated values. In the future, we will work with FHFA economists to try to distinguish the institutional purchases from the non-institutional purchases.

congress Ultimately, the collection of studies on distressed sales will be used to make further policy. We are working to ensure the facts uncovered from these studies are viewed objectively and used to encourage additional loosening of restrictions on investors. We will also fight against any efforts to misrepresent the studies as an excuse to further manipulate and inflate valuations.

Over the course of the past several months, we have received inquiries and fielded questions during webinars on the proposed utilization of eminent domain by cities to seize mortgages and write-down the principal. We have spoken to regulators about this matter as well as members of Congress to voice our concern about the use of eminent domain in this manner.

FHFA recently issued a definitive statement on the matter. We thank FHFA and Congress for listening to our concerns. Below is part of the statement released by FHFA:

“In response to an eminent domain action to restructure mortgage loans, FHFA may take any of the following steps: initiate legal challenges to any local or state action that sanctions the use of eminent domain to restructure mortgage loan contracts that affect FHFA’s regulated entities; act by order or by regulation to direct the regulated entities to limit, restrict or cease business activities within the jurisdiction of any state or local authority employing eminent domain to restructure mortgage loan contracts; or take such other actions as may be appropriate to respond to market uncertainty or increased costs created by any movement to put in place such programs.” (FHFA, August 8, 2013)

This matter now moves out of the policy arena and into the court system. The group encouraging cities to seize mortgages is called Mortgage Resolution Partners, a company according to various media reports that is backed by Roger Altman of Evercore. Altman served at the Department of Treasury under President Clinton. Mortgage Resolution Partners has so far gained the most traction in Richmond, California, where the city council appears committed to moving forward with this practice. J.P. Morgan and Wells Fargo have filed a lawsuit against the city, and it is expected that FHFA will get involved as well. Mr. Altman is covering the legal expenses of Richmond in this fight, again, according to media reports.