By: Robert S. Goldman, Neil Amper & John Bentz
Premise: The 4 necessities ---- food, shelter, clothing and medical care. Until the foreclosure crisis is solved, the housing market (shelter), and with it the economy, will not rebound. Banks are holding in excess of 3,000,000 houses on their books, all in various stages of foreclosure. Many of these properties are in such a state of disrepair that it will take years to move the inventory. Further, it has become more difficult for borrowers to finance the purchase of existing properties, as sources for capital and financing decrease, loan applications are strenuously scrutinized under stringent underwriting standards. This further contributes to the insidious blight of many communities, as many buyers do not qualify for loans, properties fall into further disrepair and neglect, and property values continue to sink. It is having a deleterious effect on the social and emotional psyche, perceptions and confidence of the public, further eroding any efforts to revive the economy. The fact is real estate is unique. It is not a commodity. No two pieces of real estate stand on the same piece of land. So, by definition, all real estate is local. The process of marketing, selling, and financing real estate has to be brought back to where it belongs … the local level, the basics. This is our Plan to solve the foreclosure crisis. If adopted, we believe it will be a major engine to drive our economy forward. It will be the catalyst to recharge all of our economic engines. The Plan is, in a macro sense, rather simple and straightforward --- that’s a very good thing. Our Plan can pretty much be implemented under the authority of the Executive Branch. It calls for the creation of a new Certificate of Deposit (“CD”). The CD could be created as a federally tax free instrument; if so, Congressional action and that of the Internal Revenue Service (“IRS”) would be required. However, it need not be a federally tax free instrument to be a desirable investment, and if so, Congressional and IRS engagement would not be necessary. Our plan calls for the creation of a National Foreclosure Bank, and the establishment of Districts to provide local knowledge. Elements have been taken from the success of the Resolution Trust Corporation during the early 1990s; although at that time the crisis was concentrated in the commercial sector, and commercial properties tend to be more responsive to national resolutions. Today, the dominant crisis is in the residential sector, and residential property is, has been, and always will be local, notwithstanding ill-fated attempts to securitize, globalize, commoditize and departmentalize it. Accordingly, we submit that for a Plan to be effective to solve the residential foreclosure crisis it must be locally based and administered. This Plan serves every constituency group: Consumer, Taxpayer, Saver, Investor, Contractor, Service Provider, Retailer, Supplier, Manufacturer, Lender, Political Office Holder, Democrat, Republican and Unaffiliated. It is important that organizations such as the National Association of REALTORS®, The National Association of Home Builders, The Society of Certified Public Accountants, Financial Institutions, and the Executive Branch of the Federal Government, including the IRS, VA, HUD, FHA, Federal Reserve Districts, Fannie Mae and Freddie Mac get behind it and be a part of a coordinated campaign to promote the Plan. The public needs to be energized about home ownership and its benefits. The Solution: Create a Mortgage Certificate of Deposit (“MCD”) that would be available to consumers through a bank, credit union or other authorized financial institution (collectively “MCD Lender”). The limit would be $100,000 per person, $200,000 for a family of 2 or more. It would be FDIC insured. It would mature in 5 years. The interest paid on the MCD would be pegged at 1.5% below then prevailing mortgage rates. This would be the source for the MCD Lender to provide financing for first mortgage purchase loans to consumers or small investors at then prevailing rates (“Mortgage Loan”). A 1.5% spread between the MCD and the Mortgage Loan would provide a reasonable profit for the MCD Lender. Consumers would receive a return greater than available through a US Treasury or other ultra-safe savings instrument. The Mortgage Loan could be amortized for a 30 year term, and like the MCD, mature in 5 years, providing a floor for market stabilization. With IRS and Congressional support the MCD could be established as a federally tax free instrument. Even if Congressional support for a federally tax free MCD is deemed unlikely, and therefore not attempted due to the current divisive and partisan political environment, a taxable MCD would still remain a highly competitive and desirable investment vehicle. Its popularity could become the path to phase out Fannie Mae and Freddie Mac, creating a module to provide a new source of financing, locally based and funded through consumer investment. For example, under current market conditions the MCD could yield a 2½% return and the mortgage loan would be at today’s prevailing rate of 4%. A 2½% return with FDIC insurance, even if federally taxable, is superior to any other ultra-safe investment, such as a US Treasury or common CD. Consumer investors/savers would earn a guaranteed and higher rate of return on their savings than is otherwise available, and for a respectable term. MCD Lenders would have a dedicated source of funding from which they can lend and generate a reasonable rate of return. Buyers/Borrowers/Property currently restricted from financing would have a financing vehicle not otherwise available, at an interest rate competitive with then current rates. The pool of stakeholders invested in the future of their respective communities and economy would increase, and with that commitment the prospects for success and an economic recovery will grow exponentially. Selling Methodology of Foreclosed Properties: Create a Foreclosure Bank based on the Federal Reserve Bank’s Twelve (12) Districts. It would mirror the Districts for purposes of familiarity. There would be a central depository where the REO Properties and mortgage financing instruments would be allocated to each District based on location. There would be a Board of Directors made up of members of each District to coordinate and administer the process in conjunction with Fannie Mae, Freddie Mac and each District. The individual Districts generate their own statistics and have the highest and best ability to analyze the housing market in their respective districts. They would set their own auction dates and decide how many would be sold based on market conditions in each locale. The Foreclosure Bank would group the properties together by location within each District in order that investors can perform their due diligence research and accurately calculate fair market values. Once this has occurred, a list of all properties available for sale would be published and each District’s list would be auctioned. The successful buyer at the auction would be free to hold onto the properties or sell all or a portion thereof to third parties. Banks holding REO Properties would be free to transfer any of their REO Properties to the Foreclosure Bank. In order to incentivize Bank’s to transfer their REO Properties, our plan would permit the Banks to write down the loss over a 5 year period or until the asset is disposed of. The Foreclosure Bank would group the properties together by location, assigning them to the appropriate District. An area in which Fannie Mae and Freddie Mac have been successful is in the conduct and coordination of auctions. They have the software and data base to structure it efficiently and cost effectively. The cost can be negotiated with each District, depending upon the number of auctions and services needed. Accordingly, the auctions would be coordinated under the direction of Fannie Mae and Freddie Mac. Once this has occurred, a list of all properties available for sale would be published and each District’s list would be auctioned. Due to participation of many banks, there will be tremendous critical mass of available properties within each District which will further incentivize large investor interest. Within a contained geographic area, and due to familiarity of a given area, investors can efficiently perform their due diligence research and accurately calculate fair market values. At auction the successful buyer would be free to hold on to the properties or sell all or a portion thereof to third parties. The Banks and Bond Funds (with whom title to mortgage financing instruments may be held) would garner a significant return on capital in a short period of time. By way of example, the Florida District may have 500,000 units. The buyer of the master list from the auction could then resell the properties in Tampa or Miami, or a portion thereof, to the highest bidders. The local investors and developers know their markets and would price their purchases accordingly. Properties which are not susceptible to bulk sales or are in such a state of disrepair as to be unmarketable could be set aside for sale to individuals and groups with limited financial resources, but the ability to rehabilitate properties, as referenced immediately below (See “Urban Homesteading”). A percentage of the properties could also be set aside to serve the public good through homes for the homeless. A few examples of beneficiaries cutting across all constituencies follow:- Urban Homesteading: Many of these homes have been so neglected and vandalized that they are not capable of being financed, and can only be sold for cash and often at prices not much more than the value of the land. Our Plan provides a mechanism for the Bank to garner far more for the asset than would otherwise occur, and at minimal risk. There are individuals, investors and contractors (collectively “Contractor”) who have the sweat equity ability, but not the cash or financing qualification ability to rehab the property. Further, many municipalities have lists of abandoned decaying properties, ruining neighborhoods and scheduled to be demolished. However, these municipalities, budgets constrained, are without the financial resources to do so. The blight becomes a contagion.The Solution: Property would be sold to the Contractor(s) for $1.00 (“Closing Date”). An appraisal would be conducted to assess the “current market value” of the property, the “estimated cost to improve/rehab” the property to comparable community standards, and the “improved value” of the property as of the Closing Date. The Foreclosure Bank would be granted a mortgage on the property for the “improved value”, less the “estimated cost to improve/rehab” (collectively “Mortgage Amount”). No payments would be required to be made on the mortgage for four (4) months (“Silent Mortgage”). During the four (4) months the Contractor, using his own funds and/or sweat equity, would be required to rehabilitate the property to its appraised “improved value”. Upon completion the Contractor would have the option of selling the Property or keeping it, at which time, in either event, the Silent Mortgage would be paid and satisfied in full for the Mortgage Amount. The MCD Lender could be a source for financing the end buyer and satisfaction of the Silent Mortgage.The benefits which flow include the following:
- A blighted property, one which would likely remain neglected and stigmatize a neighborhood, would be restored and purchased by a buyer, a family --- a community improved.
- An increase in the purchase of goods and services, and the jobs created as a result thereof.
- The Contractor would be able to earn income by rehabilitating the property, keeping it or reselling it, which, but for the Silent Mortgage he would not have had the means or ability to do.
- Upon completion of the rehab the Contractor would have instant equity arising from the discounted Silent Mortgage.
- The MCD Lender could be a source for end financing.
- The Foreclosure Bank never came up with any additional money to finance the rehabilitation of the property. It merely lent as security a distressed, neglected and non-paying asset, with the likelihood of recouping more than it otherwise would have received, and with minimal risk.
- Homeless Veterans: The VA estimates that there are 107,000 homeless veterans on any given night and 1.5 million who are considered at risk. The Veterans Integrated Service Network estimates that in their 23 districts there are these deficiencies:
- Transitional Beds Available Nationwide: 14,053
- Transitional Beds Needed: 7,825
- Homeless Veterans: 106,558
- Homeless Population: There are an estimated 1.6 million homeless people in the United States, and that number is expected to rise in the coming years.The Solution: The buyers of the auctioned properties can be required to make a portion of the Portfolio available to lower income individuals or families as rental units in conjunction with HUD. The percentage would be set by each District based on their homeless population.
- Jobs Benefit: Fannie Mae and Freddie Mac will need to retain employees to implement the program. Local management firms, contractors, and real estate brokers will need to catalogue and make sure that the properties are secured and also available for inspection. There would be a set fee structure to compensate the service providers. There would be a significant number of housing units needing repairs put into investors or owner occupied hands. This will stimulate the local construction industry and home centers as these homes are refurbished.
- Protecting Home Values. The housing market is different from locale to locale. There is not a uniform “national housing market”. Every local market enters or exits the housing downturn at different times and for different reasons. How banks manage the huge overhang of foreclosed homes will have a significant bearing on whether or not or how much further home values will fall. Banks are more apt to cut prices in order to dispose of inventory than are consumers. The Foreclosure Bank can control the flow of foreclosed properties brought to market, and thereby soften any further home price erosion. Each District is best positioned to know local market conditions within its various communities. The Districts will be able to time when, which, where and how many properties can be brought to market at any point in time, so as not to destabilize or further erode a housing market area.
- Fannie/Freddie Phase Out. The MCD, as a source for first mortgage residential purchase loans would become a new source of financing. Excepting FDIC insurance, it would be free from government intervention and taxpayer risk. It could provide the module to phase out Fannie and Freddie and the burden encumbered thereby by all taxpayers.
