The Federal Housing Finance Agency (FHFA), the federal agency that regulates the housing market in this country, is going to begin selling homes that have been foreclosed upon by Fannie Mae to vetted investors in certain parts of the country now, as part of its test run – or pilot phase – of the new “the Real Estate-Owned (REO) initiative.” The homes will be sold in blocks – a bunch of homes in one single purchase – they are not offering any individual homes for sale.
FHFA is inviting those interested in becoming real estate investors and residential landlords for properties located in parts of Florida – since our state has been one of the hardest hit, housing-wise – as well for properties located in Atlanta, Chicago, Los Angeles, Las Vegas, and Phoenix. Once okayed by the federal agency, the investors can buy the Florida real estate and then set up shop as a landlord and rent out these homes to Florida tenants.
Unfortunately, these landlords won’t be mom and pop shops. Nope. FHFA is looking for investors that can “…demonstrate their financial capacity, experience and specific plans for purchasing pools of Fannie Mae foreclosed properties with the requirement to rent the purchased properties for a specified number of years.”
Why are they doing this? Well, selling the properties moves them off the federal books and means the federal agency holding the properties will no longer be responsible for the overhead costs of their upkeep. It’s financially smart to dump this real estate as soon as possible from Fannie Mae’s balance sheet perspective. However, the FHFA press release gives loftier reasons for this garage sale of Florida homes:
“This is another important milestone in our initiative designed to reduce taxpayer losses, stabilize neighborhoods and home values, shift to more private management of properties, and reduce the supply of REO properties in the marketplace,” said FHFA Acting Director Edward J.DeMarco.
“We believe that this initiative holds promise for providing support to local neighborhoods that were especially hard hit by the housing crisis and will help meet the rising demand for rental housing in many communities,” said Michael Stegman, Counselor to the Secretary of the Treasury for Housing Finance Policy.
Congress Writes Letter to FHFA Head Asking For Focus to Be on Helping Underwater Home Owners
Almost crossing in the mail, a letter was sent to FHFA Acting Director Edward J.DeMarco by over 50 members of Congress that seeks not to make Florida homeowners into tenants, but instead to work with them so they can stay in and keep their homes. Here is the full text of that letter, sent February 27, 2012:
We write to you now as part of an ongoing effort to help the millions of our constituents who are struggling with negative home equity, as well as those who may lose their homes through foreclosure. On January 20th, you wrote to many Members of Congress, explaining your refusal “to allow Fannie Mae and Freddie Mac to engage in principal forgiveness at this time.” For the reasons set forth below, we ask that you revisit this decision immediately.
For several years, economists and experts on the housing and securities markets have called for targeted write-downs in the balances of mortgage principal owed by some underwater homeowners. On January 6th, William Dudley, President of the Federal Reserve Bank of New York, called on Fannie Mae and Freddie Mac to implement several different types of principal reductions. On February 9th, Mark Zandi, Chief Economist at Moody’s Analytics, told the Senate Banking Committee that encouraging more principal reductions offers “the best odds of ending the housing crash more quickly and definitively.” Many other leading authorities have made similar statements, including Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve, Martin Feldstein, Chairman of the Council of Economic Advisers under President Reagan, and Alan Blinder, former Vice Chairman of the Federal Reserve.
Despite this weight of expert opinion, you have refused to permit Fannie Mae and Freddie Mac to write down the principal balances of any underwater mortgages, even in cases where it can be demonstrated that doing so would yield the greatest long-term savings for taxpayers. The Government-Sponsored Enterprises (GSEs) under your conservatorship own or guarantee approximately sixty percent of the outstanding residential mortgages in the United States, including nearly three million underwater loans. Your unilateral decision to block all forms of principal write-down has prevented the housing market from recovering more quickly.
You have promised that the Federal Housing Finance Agency (FHFA) would “reconsider its conclusions if other funds become available” for principal write-downs. That has now happened. On January 27, the Treasury Department announced that it would triple the incentives for investors offering principal reductions to underwater borrowers, through the Home Affordable Modification Program (HAMP). Under this new policy, the Department will pay 18 to 63 cents for each dollar of principal that is written down, and will also make these incentives available to Fannie Mae and Freddie Mac. These new incentives will be paid out of pre-existing funds available for foreclosure relief. Your previous analysis found, at most, “slightly” more taxpayer savings for offering principal forbearance instead of principal write-downs. Given the size of the new HAMP incentives, an updated analysis may well reach a different conclusion.
Even aside from the new incentives provided by the Treasury Department, there are other compelling reasons for you to reconsider your decision against principal reductions. Unlike FHFA, private banks have no legal obligation to maximize assistance to homeowners at risk of foreclosure—they are guided solely by a desire to maximize profits and minimize losses in distressed loans. Yet many banks have written down the principal balances of a significant number of underwater mortgages held in their own portfolios. According to the Office of the Comptroller of the Currency, in the third quarter of 2011, 18.4% of all modifications and 33.4% of HAMP modifications for loans held in the portfolios of federally chartered banks included some form of principal reduction. Furthermore, private banks are better at issuing sustainable loan modifications than Fannie Mae and Freddie Mac. In 2011, the six-month re-default rate for modified loans was 13.6% for Fannie Mae and 11% for Freddie Mac, compared to 8.6% for loans held in bank portfolios. This data strongly suggests that your blanket rejection of principal reductions is misguided.
The reasoning behind your decision appears flawed and incomplete in other ways. Among other things, it appears that you have not considered how principal reductions might be structured in a more targeted fashion, to maximize taxpayer savings. As Representatives Elijah Cummings and John Tierney have noted, “even based on your own questionable assumptions and data, your most up-to-date analysis demonstrates that principal reduction programs would serve taxpayer interests more effectively than any other alternative.” Your letter of January 20th made no mention of this, even though the supporting documentation showed that principal reductions would save taxpayers more money than principal forbearance, if modifications are limited through the use of a net present value test. You also seem to have ignored other innovative ways to implement principal reductions, such as a program that would allow lenders and investors to share in the future appreciation of home values.
Our country faces a national foreclosure crisis. The American people expect government officials, whether elected or part of the civil service, to solve the complex problems that our nation confronts. We therefore urge you to harness your agency’s powers, resources, and financial expertise to prevent more foreclosures and reduce negative equity.
We hope that, with the new incentives provided by the Treasury Department, you will thoroughly revisit FHFA’s analysis of principal reductions. In particular, we ask that you determine how they can be structured to minimize both taxpayer losses and foreclosures, to the greatest extent possible. Please also provide us with a detailed explanation of the data you use to arrive at your decision.
Larry’s Tip
It has never been more urgent for anyone owning real estate in Florida to know their legal rights and remedies under both state and federal law, and under both real estate law and contract law.
- The majority of Florida real estate is underwater at this point – if there is a mortgage, odds are high that the value of the property is less than the balance on the loan – and it’s tempting to consider defaulting.
- For those who own their property outright, there is the consideration of their future property values: is their neighborhood going to decline in value as it becomes one of leased homes, owned by some block of uncaring investors?
- For those who are leasing now, what happens to their lease if the home is sold? Will they have to move the kids to new schools, fight over deposits?
- For those facing foreclosure, what is the best thing to do now – in the wake of the AG-Big Bank ForeclosureFraud settlement?
These are strange times and it’s wise to know where you stand. A phone call, an office visit with a real estate attorney can take little in time and money and give you a tremendous benefit. Too many Floridians are acting without adequate knowledge, out of desperation or fear or anger. Be smart for you and your family and know what your rights and remedies are in today’s real estate market.
If you have questions or comments, please feel free to Chat with Larry in the comments below, at info@hallandalelaw.com or (954) 458-8655.
