Renting Prosperity

Americans are getting used to the idea of renting the good life, from cars to couture to homes. Daniel Gross explores our shift from a nation of owners to an economy permanently on the move—and how it will lead to the next boom.

By DANIEL GROSS May 4, 2012, 6:08 p.m. ET for WSJ.com

Photo illustration by The Wall Street Journal

 

In the American mind, renting has long symbolized striving—striving, that is, well short of achieving. But as we climb our way out of the Great Recession, it seems something has changed.

"The Great Gatsby," the pre-eminent American novel of financial ambition, overextension and downfall, offers a revealing vignette about the great American obsession: real estate. The narrator, Nick Carraway, can't afford to buy in the rarefied Long Island world inhabited by Gatsby, and by Tom and Daisy Buchanan. But he can afford to rent. "When a young man at the office suggested that we take a house together in a commuting town, it sounded like a great idea. He found the house, a weather-beaten cardboard bungalow at eighty a month, but at the last minute the firm ordered him to Washington, and I went out to the country alone," he notes. "I had a view of the water, a partial view of my neighbor's lawn, and the consoling proximity of millionaires—all for eighty dollars a month."

 

 

The economy needs the dynamism that renting enables as much as—if not more than—the stability that ownership engenders.

In the American mind, renting has long symbolized striving—striving, that is, well short of achieving. But as we climb our way out of the Great Recession, it seems something has changed. Americans are getting over the idea of owning the American dream; increasingly, they're OK with renting it. Homeownership is on the decline, and home rentership is on the rise. But the trend isn't limited to the housing market. Across the board—for goods ranging from cars to books to clothes—Americans are increasingly acclimating to the idea of giving up the stability of being an owner for the flexibility of being a renter. This may sound like a decline in living standards. But the new realities of our increasingly mobile economy make it more likely that this transition from an Ownership Society to what might be called a Rentership Society, far from being a drag, will unleash a wave of economic efficiency that could fuel the next boom.

 

 

While downgrading the place of ownership in the American psyche may sound like a traumatic task, the cold, unsentimental fact about the American dream is that Americans never really owned it in the first place. For the past three decades, especially, consumers haven't so much bought their quality of life as they've borrowed it from banks and credit card companies. And since the Great Recession, Americans have been busy rebuilding their balance sheets and avoiding new financial encumbrances. When American consumers can't—or won't—borrow to purchase the goods and services they've come to consider part of their standard of living, how does the economy get back on its feet?

The answer lies in consumers following the example of corporations—that is, becoming more efficient. The reaction to extended leverage and foolish borrowing isn't to stop consuming and buying; it is to consume and buy more intelligently. That's what the Rentership Society is all about. And it starts at home. Literally. Housing is the biggest single component of consumption in the U.S. economy and the source of much of our present misery. According to the Bureau of Labor Statistics, the typical consumer spends about 32% of his or her budget on shelter. In the last decade, that generally meant borrowing a lot of money to take "ownership" of a home.

The vast mortgage-political-financial complex, for a variety of reasons, valued homeownership as a good in its own right. Democrats saw the extension of credit to people on the lower end of the income scale as a matter of social justice; Republicans thought homeownership would make people more bourgeois. Banks and Wall Street firms salivated at the fees mortgages could generate.

So, during the boom, the homeownership rate grew steadily, peaking at a record 69% in 2006, according to the Census Bureau. But those gains were short-lived and came at a truly massive cost: a huge mortgage bust, expensive bailouts of Fannie Mae and Freddie Mac, an overhang of millions of foreclosed properties and falling home prices. Ownership-boosters failed to note that homes purchased in 2005 and 2006 with no-money-down, interest-only mortgages weren't really bought. They were simply rented until the "owner" flipped them or walked away from the mortgage. Far from strengthening low-income neighborhoods, this destabilized them through the inevitability of foreclosure.

In the post-bust climate, renting has emerged as a much more economically efficient way to pay for housing. A one-year lease represents a far less onerous financial obligation than a 30-year mortgage. It's difficult to get into too much financial trouble as a renter. The homeownership rate has fallen from its peak in 2006 to 65.4% today. The foreclosure crisis, which has caused millions of Americans to turn over homes to lenders, is responsible for much of this decline. What's more, given the weak labor market and higher lending standards, more Americans today have a difficult time scraping together the required down payments.

For an increasing number of Americans, though, it simply makes more sense to rent these days. According to Moody's, by late 2011 it was cheaper to rent than to own in 72% of American metropolitan areas, up from 54% a decade ago. And the more people who do it, the more socially acceptable and desirable it becomes. The decline in the ownership rate means that about three million more households rent today than did at the height of the bubble.

It's tempting to view the rise of rentership as an economic step backward. Renters can't build up equity, and they have less control over their living standards than owners. Renting is generally seen as something you do when you've failed as a homeowner or are not yet ready to be one. But I'd argue the rise of rentership is a sign of a system adapting—albeit too slowly—to new realities.

Alamy

 

Renting has emerged as a much more economically efficient way to pay for housing, argues Daniel Gross.

The U.S. economy needs the dynamism that renting enables as much as—if not more than—it needs the stability that ownership engenders. In the current economy, there are vast gulfs between the employment pictures in different regions and states, from 12% unemployment in Nevada to 3% unemployment in North Dakota. But a steelworker in Buffalo, or an underemployed construction worker in Las Vegas, can't easily take his skills to where they are needed in North Dakota or Wyoming if he's underwater on his mortgage. Economists, in fact, have found that there is frequently a correlation between persistently high local unemployment rates and high levels of homeownership.

Home builders and property owners have caught on to the economic opportunity presented by the move toward rental. Fannie Mae and Freddie Mac have become reluctant owners of more than 200,000 properties thanks to the foreclosure crisis, working through the backlog, one painstaking foreclosure sale at a time. But in February, Fannie Mae said it would put up for sale some 2,490 homes as a package, asking for $321 million. The Wall Street Journal reported that an assortment of real estate companies and private-equity investors were considering making bids. The presumption was that these sophisticated investors would turn the homes into rental properties. No less a sage than Warren Buffett told CNBC in February that he'd love to buy "a couple hundred thousand" single-family homes for rentals.

The depressed home-building industry has also shifted gears to adapt to the new reality. Housing starts for multifamily units have risen sharply since 2009, according to the Census Bureau. In 2011, whereas single-family housing starts fell 9% from the year before, starts of structures with five or more units were up 60%. In the first quarter of 2012, starts of multifamily housing structures were up another 27%, while single-family starts were up only 16.7%.

What's more, the builders of these structures increasingly intend to rent them out. In 2007, only 62% of the housing units in buildings with two or more units were built for rent. In 2009, 84% of the units in such buildings were built to be rented. In 2011, 91% of the units in such structures were aimed at the rental market.

And the rising popularity of rentership is hardly contained to the housing market. Indeed, it has spurred the creation and growth of innovative businesses in a number of other realms—particularly those that cater to America's cash-strapped, credit-wary youth.

Take cars. The Bureau of Labor Statistics says that private transportation—owning and running a car—is the second largest cost for a typical American household, accounting for 16% of expenditures. Factoring in finance costs, depreciation, repairs, insurance, taxes and gas, AAA calculates that an owner of a midsize sedan who drives 15,000 miles a year spends $8,588 a year on his car.

Enter auto-sharing firm Zipcar. Founded in 2000, it grew by focusing on cities and college campuses. It uses information technology to manage its fleet, and control access—people get cards that let them into garages where cars are kept and into the cars themselves. Users in New York pay a $60 annual fee and then $8.75 per hour on weekdays and $13.75 per hour on weekends—no extra charge for gas or insurance or miles. As the U.S. economy contracted, Zipcar went into hyper-growth: from 225,000 members in 2008 to 650,000 members and 9,500 cars in November 2011. Zipcar, which went public in 2011, has had success in the predictable big cities like Boston, New York and San Francisco, but its vehicles can also be found on 350 college campuses and in smaller cities like Providence, R.I., and Portland, Ore. Large rental agencies like Enterprise and Avis have responded by rolling out similar services.

Or take textbooks. College textbooks are, in effect, rental goods. Students buy them at retail, use them for four months, and then resell them to the campus store or a used-book dealer. In 2010, the U.S. college-textbook market was worth about $4.5 billion, according to the American Association of Publishers. But why buy textbooks when you can spend less and rent them? Chegg.com, founded in 2001, has raised more than $200 million in funding and is aiming to displace the college bookstore. An undergrad can buy an economics textbook new for, say, $263. At Chegg.com, she can rent a hard copy of the same book for $94 for 180 days, or an electronic copy for $128 for the same period. As more students come to campus with Kindles, Nooks and other e-readers, the more efficient consumption of college textbooks is likely to grow rapidly.

Rent the Runway, another Rentership Society business, has likewise found a foothold on college campuses. The company was started in 2009 by Harvard Business School classmates Jennifer Hyman and Jennifer Fleiss. Ms. Hyman has called the company "the Netflix for fashion." As with Netflix, customers open accounts and then pay for the temporary use of goods sent to them through the mail. A Thread Social Poppy Sweetheart Dress (retail price: $365) rents for $50. Accessorize with Crislu Crystal Tear Earrings (retail $96, rent for $20). In business for less than two years, Rent the Runway has raised $31 million in venture capital, attracted one million customers and is turning a profit.

All these models involve more sharing than American consumers are typically accustomed to doing. But the culture is changing. Consider how quickly the attitude of consumers toward housing has changed. And I'm not just talking about the rising incidence, popularity and acceptance of home and apartment rental. At the height of the boom, people believed their homes generated cash by serving as a source of home equity credit, or by returning profits when they were sold. Today, not so much.

But thanks to another postrecession business, efficiency-seeking homeowners have come to realize that their homes can still generate cash. Airbnb, founded in August 2008, is dedicated to the promise that lots of people are willing to earn money by renting out a room in their home and that lots of people are willing to save money by crashing in strangers' abodes rather than in motels or hotels.

Only in America could entrepreneurs rapidly transform couch-surfing into a high-tech business worth more than $1 billion in the space of 36 months. With over 100,000 listings available in more than 16,000 cities and 186 countries, it's a real business. It has booked over 5 million nights. In July 2011, Airbnb raised $112 million from venture-capital firms Andreessen Horowitz, DST Global and General Catalyst. But the real value of Airbnb isn't necessarily what profits it brings to investors. Rather, it's the cash it puts into the hands of homeowners. That cash is not enough to turn around the economy. But it's part of a sea change in how people view the true value of their property and how they role of ownership in their lives as a whole.

Finally, perhaps, Americans are absorbing a piece of wisdom not from Gatsby, but from Thoreau: "And when the farmer has got his house, he may not be the richer but the poorer for it, and it be the house that has got him."

—Mr. Gross is economics editor at Yahoo Finance. This essay is adapted from his new book, "Better, Stronger, Faster: The Myth of American Decline and the Rise of a New Economy," which will be published Tuesday by the Free Press.

A version of this article appeared May 5, 2012, on page C1 in some U.S. editions of The Wall Street Journal, with the headline: Renting Prosperity.

Original Post: http://online.wsj.com/article/SB10001424052702304746604577382321021920372.html?mod=WSJ_RealEstate_RIGHTTopCarousel

HUD’s Donovan: Fannie, Freddie Should Embrace Loan Forgiveness

By Nick Timiraos  for WSJ.com February 16, 2012, 4:27 PM

The Obama administration would like the federal regulator for Fannie Mae and Freddie Mac to begin reducing loan balances for certain troubled borrowers, a top official said Thursday.

“More and more economists across the political spectrum are recognizing [principal reduction] is a critical step,” said Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, in an interview with The Wall Street Journal. “If a family is in their home for 10, 15 years and has no hope of being able to build equity again, they’re going to give up at some point.”

Officials have said for more than a year that they’d like to see mortgage giants Fannie and Freddie adopt principal reduction, and several steps in recent weeks have put more pressure on the Federal Housing Finance Agency, the firms’ regulator, to approve write downs.

“Clearly it’s an important piece of the puzzle that Fannie and Freddie move forward on this,” said Mr. Donovan. Last month, the White House said it would triple incentive payments under an existing loan-modification program that subsidizes the cost of loan forgiveness and that it would offer them to Fannie and Freddie.

When the principal reduction program was rolled out two years ago, those incentive payments weren’t extended to Fannie and Freddie, and their regulator has said there are less costly ways to help borrowers avoid foreclosure. The firms are being propped up with massive taxpayer infusions of their own, and the FHFA is tasked with preserving the firms’ assets.

By providing new taxpayer funds, the administration is making it harder for the FHFA to maintain its stance that principal reduction is less costly because Treasury funds will effectively subsidize some of those losses. The FHFA has said it is currently evaluating the newest proposal.

The firms are “working right now…to make a decision on whether they are going to begin principal reduction,” said Mr. Donovan. “We certainly hope that they will start to do that based on these incentives. That’s why we made them available.”

Separately, Mr. Donovan said he remained “concerned” about the prospect of taxpayers being forced to backstop losses at the Federal Housing Administration. Budget projections this week showed that the agency could deplete its reserves this year. The FHA, which doesn’t make loans but instead insures lenders, has played a critical role supporting housing markets amid a sharp pullback by the rest of the market.

The agency could announce within days its plan to increase the premiums charged to borrowers in order to build up its reserves. HUD also announced in recent days settlements with two of its biggest lenders over fraudulent loan claims that will net more than $680 million for the agency.

But Mr. Donovan warned of precipitous actions to boost reserves that limit the availability of credit and undermine fragile housing markets. “This is a delicate balancing act because if we go too far…what we’re going to be doing is stalling the momentum that we have in the housing recovery,” he said. “Frankly, that not only hurts homeowners more broadly in the housing market, it hurts FHA because the value of our existing investments goes down.”

• Fannie Mae,
• Freddie Mac,
• Obama administration

Original Post: http://blogs.wsj.com/developments/2012/02/16/huds-donovan-fannie-freddie-should-embrace-loan-forgiveness/

What The Mortgage Relief Plan Would Do For Homeowners

 

by Deborah L. Jacobs, Forbes Staff  for Forbes.com

After more than a year of wrangling over various mortgage relief proposals, influential state leaders seem close to adopting a plan that Pres. Obama announced Feb. 1. Attorney General Eric T. Schneiderman of New York and California’s attorney general, Kamala Harris have indicated they are closer to agreement than in the past.

There are two important elements of the plan and details of both have been a subject of fierce disagreement. One, which could be worth about $25 billion, relates to how much money would be allocated to benefit homeowners and the specific relief they would receive. The other involves the power states would have to investigate past practices by banks, oversee future ones and monitor compliance with the plan.

If the plan is adopted, here’s what it would do for homeowners in specific situations.

Mortgage underwater but current with payments. More than 10 million homeowners in the U.S., due to a decline in home prices, owe more on their mortgages than their houses are worth. So even though interest rates have declined, they have been unable to refinance. The latest plan would enable people who have been making loan payments on time to save about $3,000 a year on their mortgage by refinancing with lower-interest loans guaranteed by the Federal Housing Administration.

Mortgage underwater and behind with payments. Depending on how many states sign on to the plan, up to $17 billion would be set aside to reduce principal for homeowners who are behind on their payments and owe more than their houses are currently worth. The plan would not guarantee a minimum amount of mortgage relief by state.

Victims of foreclosure fraud. The plan would provide payments of about $1,800 apiece to approximately 750,000 families that have been the victim of an improper foreclosure practice. Since 2010, federal authorities have been investigating banks’ routine electronic notarization of documents being transferred from one financial institution to another as part of the foreclosure process–a practice known as robo-signing.

Compensation is likely to be offered to people who lost their homes between Jan. 1, 2008, and Dec. 31, 2011. They would not be required to give up their right to sue the financial institutions. Banks, among them the five biggest mortgage providers–Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial—want to be relieved of liability for future claims involving robo-signing.

In announcing the plan on Feb. 1, the President said he was “working to turn more foreclosed homes into rental housing.” So far such a plan is not contained in the pending proposal.

Deborah L. Jacobs, a lawyer and journalist, is the author of Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide. You can follow her articles on Forbes by clicking the red plus sign or the blue Facebook “subscribe” button to the right of her picture above any post. She is also on Twitter.

Original Post: http://www.forbes.com/sites/deborahljacobs/2012/02/06/what-the-mortgage-relief-plan-would-do-for-homeowners/

Economists See Ways to Aid Housing Market

By NICK TIMIRAOS  for wsj.com

The underpinnings of a housing recovery are hiding in plain sight: sharp price declines, low mortgage rates and rising rents have made owning more affordable than renting in a growing number of markets.

Yet housing largely remains in a funk. The prospect of continued price declines—led by the oversupply of foreclosed homes—has deterred some potential buyers, while others can't qualify for loans.

Many economists, including some at the Federal Reserve, are urging President Barack Obama to do more, and the president will be "aggressive on housing" in his State of the Union address on Tuesday, his housing secretary said last week. The administration is already rebooting a refinancing initiative and putting finishing touches on programs to convert some foreclosed properties into rentals.

View Interactive

What more can be done? Economists cite three broad ideas that could advance a housing recovery.

First, local investors could play a greater role in spurring a recovery in their own communities. Some mom-and-pop investors have begun to buy up excess housing stock and rent it out.

These buyers are important to clear the large "shadow supply" of foreclosures. Banks owned around 440,000 homes at the end of October, but an additional 1.9 million loans were in some stage of foreclosure, according to Barclays Capital.

While there's no shortage of investor demand in many markets, financing remains an obstacle. In 2008, Fannie Mae and Freddie Mac, the main funders of mortgages, faced soaring losses from speculators and reduced to four from 10 the number of loans they would guarantee to any one owner. Fannie now backs as many as 10 loans, but some banks have kept lower limits.

"If that number were raised...to 25, you would very quickly start whittling down this very big backlog," said Lewis Ranieri, the mortgage-bond pioneer, in a speech last fall. He said loans should be made on conservative terms that include 30% or 35% down payments.

Today's investors differ from the speculators who earlier bought on the prospect of ever-rising values that inflated the real-estate bubble. In contrast, today's mostly all-cash buyers estimate values based on market rents. But economists say because they are underfunded and often the sole buyers, they are driving hard bargains that have homes selling below their replacement costs.

The mortgage-finance companies and their regulator "are ignoring the market fundamentals of who the buyers are and where the money is," said Tim Rood, a partner at the Collingwood Group, a housing-finance consultancy. "Right now, investors are treated like pariahs. You want to clear some inventory? Finance them."

For the past four years, prices of foreclosed and traditional homes fell in tandem, but in recent months, a new pattern has emerged. U.S. home prices were down 4.3% from one year ago in November. But after stripping out foreclosures and other "distressed" sales, prices were down just 0.6%, according to data firmCoreLogic.

Lawmakers also could consider eliminating capital-gains taxes on properties bought as a longer-term investment and converted to rentals as well as allowing them to accelerate the depreciation of those properties, said William Wheaton, a professor of economics and real estate at the Massachusetts Institute of Technology.

"We need to re-establish equilibrium. I don't want to see another spike in house prices, but the homeownership rate is dropping and we also don't want to see rental spikes," Prof. Wheaton said.

Second, policy makers could restore clarity to lending by finalizing a clutch of pending regulations. The government's extraordinary steps to rescue Fannie and Freddie helped prevent a cataclysmic shock but it has made no real movement to overhaul the companies and the nation's broader housing-finance machinery.

While prospects are dim for a revamp before the election, smaller steps to establish certainty around the rules for lending as well as handling soured mortgage loans could make banks less stingy with credit.

For example, Fannie and Freddie are pushing banks to repurchase any defaulted loans that they can prove ran afoul of underwriting standards, even if the loan went bad for another reason, such as job loss. The "blanket repurchase regime" has led banks "to focus only on the lowest-risk customers," said William Dudley, president of the New York Federal Reserve, in a speech this month.

Third, a growing number of economists are warning that the overhang of debt in some of the most distressed housing markets will linger for years, particularly if more borrowers default. They say mortgage investors and banks should consider reducing debt for more troubled homeowners.

Principal write-downs remain controversial and have high upfront costs. But the problem of negative equity looks unlikely to cure itself: In markets such as Las Vegas, more than six in 10 borrowers owe more than their homes are worth.

Banks are rightly worried that widespread debt forgiveness could encourage more borrowers to default, but several proposals seek to limit that moral hazard. Prof. Wheaton said investors in the loans should be given equity stakes in homes in order to deter all but the most desperate borrowers from seeking relief, and that relief should be limited to borrowers who are deeply underwater.

"This needs to be a shared responsibility," he said. "For borrowers silly enough to borrow enough at the top of the market, there was a lender stupid enough to lend."

Principal write-downs could also be done on an "earned" basis, where borrowers receive relief only if they stay current on their loans, said Daniel Alpert, managing partner at Westwood Capital, which has employed the technique when buying distressed mortgages.

Even then, write-downs will remain under-used until regulators or lawmakers simultaneously deal with the second mortgages, which are primarily held by banks, sitting behind many underwater first mortgages.

Mustering the political will to take any of these three steps wouldn't be easy. Given the state of the market, "there isn't a solution which will make everyone love you and cost no money," Mr. Ranieri says.

Indeed, no single idea will fix all of housing's problems. Many involve taking on more risk or rewarding bad behavior.

Write to Nick Timiraos at nick.timiraos@wsj.com

Original Post: http://online.wsj.com/article/SB10001424052970204301404577173001251941984.html?mod=WSJ_RealEstate_LeftTopNews

Six Questions on Foreclosure-to-Rental Programs

By Nick Timiraos for WSJ.com

Wednesday’s Journal looked at how one private-equity firm is making a bet on renting out single-family homes acquired through foreclosure. In the coming weeks, federal policy makers could roll out pilot programs to further test the concept. Here’s a look at what’s involved:

What is the government considering?

Government officials solicited more than 4,000 comments from the public last year on potential initiatives that would take foreclosed properties off the market and rent them out. The initiatives are likely to focus only on loans backed by federal entities Fannie Mae, Freddie Mac, and the Federal Housing Administration.

There are two different types of programs that officials are likely to consider. Under the first, the FHA could sell properties in bulk to investors who agree to rent them out. Bulk sales have been rare largely because investors tend to demand deep discounts that sellers haven’t been willing to accept.

A more likely option for Fannie and Freddie, if they move forward with any pilot programs, would be to set up pools of properties in which third-party investors would take a stake. Investors could be responsible for handling maintenance and day-to-day operation of the rental pool, with the mortgage-finance giants sharing in some of the returns.

How many homes are we talking about?

Fannie and Freddie held around 180,000 homes at the end of September, down from around 235,000 one year earlier. The FHA held around 35,000 homes at the end of November, down from 55,000 one year earlier.

The drop figures to be temporary because many loans backed by the FHA have fallen into foreclosure, but banks have been slow in taking back homes after they were caught fabricating documents in order to quickly repossess homes.

Why does the idea of renting out homes have appeal?

Officials like the idea for three reasons. The first is that a backlog of foreclosures estimated in the millions could roll onto housing markets in the coming years. The New York Fed estimates that banks and mortgage companies could take back 1.8 million properties in each of the next two years, up from 1.1 million in 2011 and 600,000 in 2010.

Second, there are signs that home prices of traditional homes are stabilizing in some parts of the country, even as distressed sales drag down property values. The gap between prices of traditional home sales and distressed home sales has widened in recent months. For the year ending in November, home prices were down by 4.3% as measured by real-estate firm CoreLogic. But prices were down by 0.6% when distressed sales are excluded.

Third, this is attractive because rents in many parts of the country are beginning to rise.

What parts of the country could see these types of programs?

In a white paper released by the Federal Reserve last week, officials identified 60 metro areas where federal entities have at least 250 foreclosed properties for sale — a scale that could be large enough to justify a rental program. The largest concentrations of foreclosures held by these entities were in Atlanta, with 5,000 units, followed by Chicago, Detroit, Phoenix, Los Angeles, and Riverside, Calif., which each have between 2,000 and 3,000 units.

While not all of these properties are good candidates for conversion to rental, preliminary estimates from the Fed suggest that around two-fifths of Fannie’s foreclosed properties could generate yields of 8%, which could be enough to warrant renting rather than selling the property.

Why can’t the private sector do this on its own?

Certainly, private investors have been building up operations in the rent-and-hold arena, and it’s possible that these types of rental transactions could happen anyway without any government involvement.

But there are two main obstacles facing investors: financing and scale. Most foreclosure investing has been done by local investors. But these outfits have faced challenges getting financing to buy enough homes to scale up a viable rental model. Institutional investors, meanwhile, have deeper pockets but banks have largely resisted big bulk sales of homes, making it harder for them to assemble big pools of homes.

Will this program have any impact on home prices?

To do so, the program would need to be quite large, and that isn’t likely to happen for some time. Michelle Meyer, an economist at Bank of America, says the proposed programs run the risk of being too small to have much impact.

Economists at Goldman Sachs estimate that moving all foreclosed properties from the for-sale market to the rental market would increase home prices nationally by around 0.5% in the first year and 1% in the second year. Of course, no one is talking here about moving all properties from the for-sale market to the rental market, so this shows the maximum effect of such initiatives. The real effect figures to be far more modest.

Original Post: http://blogs.wsj.com/developments/2012/01/12/six-questions-on-foreclosure-to-rental-programs/

Q&A: Step-by-step guide to foreclosure

Q&A: Step-by-step guide to foreclosure

WEST PALM BEACH, Fla. – Nov. 29, 2011 – Question: I read in the paper that the banks are starting the foreclosures again. I just got served with a foreclosure lawsuit. Can you explain the process in layman’s terms?

Tony

Answer: Each state has different versions of the foreclosure process. In Florida and some other states, a lender must get permission from a judge before it can repossess your home.

When you are served with a foreclosure lawsuit, your lender files a “complaint” against you, laying out the facts as it sees it. It’s basically telling a story as to why it thinks that it should get your house as payment toward the debt that you owe.

Along with the complaint, it serves several other documents, such as the “summons,” which gives the court power over you, and the “lis pendens,” which is a document filed in the public records to let everyone know that the property is the subject of a lawsuit.

When you are served with a lawsuit, you typically have 20 days to respond or you will be in “default,” which means that you have waived all of your defenses to the lawsuit, allowing the bank to proceed with the foreclosure. This is not a good idea. At this point, your attorney will respond to the suit with a “motion to dismiss” or an “answer.” If your attorney feels that the bank has no chance to win based on everything that it alleged in the complaint, he or she will file a motion to dismiss the suit.

If, however, the suit is not defective as filed, your attorney will file an answer, in which he or she admits or denies each of the bank’s statements from the complaint. The answer also will also set forth your “affirmative defenses.”

An affirmative defense explains why the bank should not get your home even though you may not be making your mortgage payments.

At this point in the lawsuit, several months or more will have gone by and the attorneys will begin “discovery.” That’s the process of getting to the truth by asking each other questions and getting documents from the other side for review.

During the discovery phase, you and your lender will probably go to a “mediation.” In a mediation, both you and your lender will lay out your side of the story before an unbiased third party, the mediator, who will encourage you both to voluntarily settle the case. At a mediation, no one is forced to settle the case. Both sides need to agree.

The discovery process can take six months or more. Once it is complete, you or your lender may make a “motion for summary judgment,” which is basically saying to the court that your side of the case is so strong that there is no possible way for you to lose. Most foreclosure cases end at the summary judgment hearing because the judge rules for the lender. But if the judge thinks there are still some questions to be answered, there will be a trial. At trial, the judge (or jury) will determine the truth and decide who wins the case.

If you win, the lender has failed and you keep your house. If the lender wins, which is much more likely, the judge will set a date for your home to be sold, with the proceeds from the sale going toward paying your lender back for the money that you borrowed.

If the fair market value of your home is not enough to pay your loan back in full, your lender may ask for a “deficiency judgment.” That gives the lender the right to come after you for the difference between the market value of your home and the amount that you owe your lender.

If the sale brings more money than you owe your bank, you get back what’s left over. (Check with an attorney about the process for receiving any refund.)

If you hire an attorney, the entire process typically will take about two years, during which time you can be working with your lender toward a loan modification, short sale or deed in lieu of foreclosure. Of course, if all else fails, there is always bankruptcy, but that’s a different topic for another column.

About the writer: Gary M. Singer is a Florida attorney and board-certified as an expert in real estate law by the Florida Bar. He is the chairperson of the Real Estate Section of the Broward County Bar Association and is an adjunct professor for the Nova Southeastern University Paralegal Studies program. Send him questions online at http://sunsent.nl/mR20t7 or follow him on Twitter @GarySingerLaw.

The information and materials in this column are provided for general informational purposes only and are not intended to be legal advice. No attorney-client relationship is formed. Nothing in this column is intended to substitute for the advice of an attorney, especially an attorney licensed in your jurisdiction.

© 2011 the Sun Sentinel (Fort Lauderdale, Fla.), Gary M. Singer. Distributed by McClatchy-Tribune News Service.

Original Post: http://www.floridarealtors.org/NewsAndEvents/article.cfm?id=267984

Report: Fannie Mae, Regulator Missed Foreclosure Abuses

Original Post: http://blogs.wsj.com/developments/2011/10/03/report-fannie-mae-regulator-missed-foreclosure-abuses/

By Alan Zibel and Nick Timiraos

Mortgage titan Fannie Mae and its federal regulator failed to pay enough attention to mounting evidence of abuses at foreclosure-processing law firms until the issue gained broad public attention last year, a federal watchdog says.

The inspector general of the Federal Housing Finance Agency, in a report being released Tuesday, questioned Fannie Mae’s oversight of law firms that conduct foreclosures on its behalf.

Fannie uses a network of law firms to handle foreclosures for the banks and other mortgage servicing companies that collect payments on loans backed by Fannie. The network arrangement allows Fannie to negotiate discounted rates with approved firms, which in turn can lock in business from the nation’s largest mortgage investor.

The inspector general’s report indicated that the FHFA had a growing awareness of potential foreclosure-processing problems in June 2010, when it conducted a two-day field visit to Florida. The FHFA, according to the inspector general, found that “documentation problems were evident and law firms…were not devoting the time necessary to their cases due to Fannie Mae’s flat fee structure and volume-based processing model.”

After that Florida trip, FHFA staff told Fannie officials that its attorneys were “increasingly unprepared when they enter the courtroom,” leading to a larger backlog of foreclosures.

But the warnings weren’t enough to head off widespread document problems that surfaced months later. In September 2010, banks suspended foreclosures after it emerged that they were using so-called robo-signers to process hundreds of documents without verifying their contents. Fannie and its smaller sibling, Freddie Mac, terminated one of their main Florida law firms last November after uncovering widespread abuses.

In a review completed by the FHFA this past January, the regulator concluded that Fannie Mae could have reacted to foreclosure deficiencies sooner. It also found that Fannie had “inadequate” controls and monitoring of its legal network.

Homeowners “shouldn’t have to worry whether they will be victims of foreclosure abuse,” said Steve Linick, the inspector general. The failures by FHFA and Fannie to provide proper oversight of foreclosure attorneys represent a “breach of the public trust and an assault on the integrity of our justice system,” said Rep. Elijah Cummings (D., Md.), who made the initial request for the inspector general to conduct the report.

An FHFA spokeswoman said that the FHFA is “concluding our supervisory work in this area and we will direct the enterprises to take whatever action is warranted once we are done.” Fannie Mae declined to comment on the report.

Fannie last year hired an outside law firm to do compliance for its legal network and to conduct a review of its largest Florida law firms. But the inspector general faulted those reviews for being too narrow in scope and said they “missed the opportunity to confirm and provide a better understanding of the allegations of foreclosure abuses.”

The report also said that the FHFA should have a formal process to share information about “problem law firms.” For example, the report said Freddie Mac last year terminated a law firm that processed over 43% of Fannie Mae’s foreclosures in Florida and voluntarily told Fannie it had terminated the firm, in part due to foreclosure processing abuses. Fannie decided to retain the firm, the report said, in part because it concluded that the cost of transferring its files to a new firm “would be substantial.”

The report also noted that Fannie had been aware of potential problems with legal filings in foreclosures since late 2003, when a Fannie Mae shareholder notified the company of potential abuses. An outside law firm, Baker & Hostetler LLP, conducted an independent review for Fannie in 2006 in response to the shareholder’s allegations. The report’s findings were first reported by The Wall Street Journal in March.

The 2006 review found no evidence that homeowners had been improperly placed in foreclosure, but it said that foreclosure attorneys working on Fannie’s behalf in Florida had “routinely made” false statements in court in an effort to more quickly process foreclosures, among other warnings.

Fannie officials also told investigators in 2006 that the company had opted against performing regular reviews of its foreclosure attorneys because the company’s lawyers felt the firm would be better insulated from responsibility for misconduct. The report said the approach was under review at the time, and Fannie in 2008 revamped its attorney network.

A Fannie spokeswoman said the company took a series of steps to address specific issues identified by the 2006 report.

• Fannie Mae,
• Federal Housing Finance Agency,
• Foreclosures