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.
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
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