The multibillion-dollar federal plan to buy up financial firms’ bad assets in an effort to kick-start the credit markets has more to do with "paper" than property, say experts.
And while the details on the form and function of the plan have not been finalized, they also say there is the possibility that the government will end up owning homes as a result of the bailout plan’s implementation.
Under the plan (see Inman News), the Treasury secretary can buy up to $700 billion in mortgage-backed securities and other assets — the so-called "paper" instruments clogging banks’ books — to encourage new lending.
There are also provisions in the plan that require the Treasury secretary to seek to "maximize assistance for homeowners and … encourage the servicers of the underlying mortgages" to push homeowners to participate in programs that are intended to minimize foreclosures.
And the legislation, signed earlier this month, provides that the Treasury secretary must work with other agencies and participants of securities pools to allow renters to remain in their homes under the terms of their current lease and to account for "the need for operating funds to maintain decent and safe conditions at the property."
Larry A. Rosenthal, executive director of the Program on Housing and Urban Policy at University of California, Berkeley, said, "There was no notion in the original proposal by (Treasury) Secretary Paulson that there would be the purchase of the underlying real estate assets," though the final legislation does involve "greater flexibility for assistance that would go directly to homeowners."
There is precedent for the public purchase of private property and other assets, he said, citing Depression-era programs and programs stemming from the savings-and-loan crisis of the 1980s.
The Resolution Trust Corp. was established by the federal government during the savings-and-loan crisis to sell off the assets of failed companies, and the RTC contracted with private auction companies to sell off commercial and residential properties that the federal government acquired through the failure of hundreds of savings-and-loan companies.
Likewise, a similar entity could be used to recoup taxpayers’ costs during the current crisis, Rosenthal said.
"You need something that’s quite agile, something that’s quite savvy, and something that operates like a profit-making organization that doesn’t come out of the government organically. It does come out of the marketplace organically," he said.
"I’m just hoping that all of the red tape and all of the protections in the system against public corruption — that that doesn’t translate into losing the kind of quick fix we need. I have a hard time believing that a lot of the big decisions are going to be made between now and election day," he added, referring to the Nov. 4 presidential election.
Delores Conway, director of the Casden Forecast for the University of Southern California, said that the federal government could end up owning property through the bailout plan.
Because of the complexity of the mortgage-backed financial instruments, the federal government may end up owning only a portion of some assets, as there may be hundreds of other investors who share ownership of those assets.
"It’s not clear whether (the government) can actually gain access to the asset itself," she said. "We’re really waiting to see how this is going to be executed."
There may be instances of "clustering" of property financing within specific geographic areas, as a single mortgage broker or lender may have arranged financing for most of the homes in a single development or city area, Conway said, and it may be easier for the federal government to obtain direct access to those properties in such cases.
"It wasn’t just random. There was some order to it, some organization — often geographic," she said, citing Cleveland as an example of a city in which individual banks have taken ownership of thousands of properties.
It may be easiest for the federal government to focus on buying up the mortgage-related paper for loans that are geographically clustered, she said, as those would perhaps be the "easiest to buy and the easiest to restructure," or pursue modifications to keep homeowners in their homes and prevent foreclosure.
Liz Giovaniello, a spokeswoman for the National Association of Realtors, said that the current federal plan seeks to prevent the mass auctions of property that occurred during the savings-and-loan crisis, as it deals with financial companies that are still in operation rather than defunct companies. "Let’s hope the bailout will restore confidence before all of that happens," she said.
Paul Bishop, managing director of research for the National Association of Realtors, also noted that the goal of the federal plan is to quickly engage in loan workouts to minimize foreclosure and federal ownership of property.
He said that distressed sales, including short sales of properties and sales of bank-owned (REO) properties, account for about one-third of recent home sales, and the association will continue to play close attention to "what role Realtors should play in clearing out all of these properties on the banks’ books," as the Treasury plan unfolds.
The National Association of Auctioneers has been hopeful that its members may be able to assist the federal plan.
In a letter last month to U.S. Treasury Secretary Henry M. Paulson that was also distributed to congressional leaders and financial industry regulators, the National Association of Auctioneers noted the history of the auction industry in contracting with the RTC to sell off government-owned properties.
"As the administration and Congress discuss solutions and remedies for the current financial crisis, one alternative that has emerged has been the resurrection of an agency similar to the Resolution Trust Corp.," the auctioneers’ group noted in its Sept. 19 letter.
"The auction industry and the professionals who represent it assisted our government then, and we stand ready to assist it again today," the NAA wrote in the letter. A report by the NAA notes that residential real estate sales at auction rose from $11.5 billion in 2003 to $16.9 billion in 2007, a 46.6 percent gain.
Marty Higgenbotham, owner of Higgenbotham Auctioneers International Ltd., a national auction company, said he views the current financial crisis as "almost the same" as the savings-and-loan crisis in the late ’80s and early ’90s.
His company participated in about eight to 10 auctions related to the RTC assets, he said.
If the government does end up owning a lot of property through the implementation of the bailout plan, he said the best plan would be to put it on the market quickly.
"It doesn’t make any sense for the government … to hold on a property waiting for the market conditions to change. The depreciation of the property in the holding period will far exceed the appreciation (in a sale after the hold period) because the house in a year’s time can just go to pot," he said.
"It’s astounding what can happen in a year’s time on a piece of real estate," he said, due to neglect and vandalism.
Meanwhile, Michael Davin, president of CataList Homes, a company that conducts property auctions through a partnership dubbed Zetabid (see Inman News) with auction company DoveBid and the Los Angeles Times Media Group, said he hopes the federal government does not auction off properties as a part of the bailout plan.
He said there is already a demand for buying up bank-owned properties, so those assets are not illiquid and there is no need for the government to buy and resell bank-owned foreclosure properties.
The federal government is more interested in buying up securities and other untradeable assets this time around, he said — "not the underlying notes. There has been a market for nonperforming whole loans and seconds this whole time — it’s these funky derivatives and collateralizations that have been created that can’t be sold. That’s what (the federal government) is going to try to provide a market for."
He added, "If they do go into the whole loan market, there is a market for those now. The only reason for the government to play in that would be to provide an increase over retail value. Then (the government is) paying more than the market will bear."
There are still a lot of unknowns with the federal plan, though, said Davin. "They could ultimately … buy homes, and decide, ‘Let’s create an affordable housing program.’ You just never know what’s going to happen."
There are some potentially big pitfalls with the government engaging in widespread mortgage workouts, Davin said, as some homeowners may decide to stop making mortgage payments in order to receive workouts.
"Hopefully with oversight it’s done correctly. There will be challenges … with any program of this magnitude," he said.
Mark Dotzour, chief economist at Texas A&M University’s Real Estate Center, said he believes it is unlikely the government will seek to buy bank-owned property through its bailout plan.
"It seems that it would be good to remove the excess supply from the market," he said. "However, there is a strong feeling that excess demand drove house prices to unaffordable levels and that prices must continue to fall to restore affordability. As long as this view is held, it is unlikely that the government will make any moves to shore up home prices."
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