Merrill: Fannie, Freddie Rules Hurt Housing Market
Since the bruising August debate on raising the debt ceiling, federal lawmakers have pivoted to the topic of job creation. As we enter another election year, it’s unlikely they’ll pivot back.
But so far, politicians’ laser focus on jobs has largely ignored one simple fix that would boost employment and help small businesses and distressed communities. The fix? Removing the onerous restrictions Fannie Mae and Freddie Mac have placed on the private purchase of their toxic housing inventories.
For decades, private buyers were able to resell properties they’d purchased from Fannie and Freddie at their discretion. This past year, the two housing giants added a contractual addendum dictating what private real estate investors may do after a house has been purchased, including the time frame under and price at which it may be resold.
Fannie and Freddie have told U.S. banks that they must do the same. It’s unclear whether these two sought the approval of the Federal Housing Finance Agency, their overseer since going bankrupt, or Congress, the democratically elected institution with the power to write housing policy, before making this change.
The restrictions contribute to a continuingly weak housing market by keeping private real estate investors — small-business owners who buy and sell properties for a living — out of the market. These investors often offer the last, best hope for families facing foreclosure. The collateral damage caused by this policy is visible in Congressional districts throughout the country. Each foreclosure drives down neighboring home prices. Communities with foreclosure clusters experience higher crime, collect fewer taxes and face greater overall economic hardships.
Fannie, Freddie and the banks argue that these policies are necessary to prevent fraud and get the best price for their assets. But Fannie and Freddie’s main concern here is not a new breed of fraud. The true issue is that every time these toxic assets are sold to a private buyer, their true value is revealed — something no one at either entity, or the banks, wants.
Furthermore, it is not the job of Fannie and Freddie — which bear responsibility for the housing meltdown — to set national housing policy. They will say this policy is just an internal business decision. Lawmakers shouldn’t be fooled: This is an attempt by Fannie and Freddie, currently under taxpayer conservatorship, to dictate federal policy.
There are more sensible ways to regulate an industry than slowing down commerce, which is what this policy does. The housing recovery depends on finding willing and financially stable buyers for these homes. Small, private real estate investors could help turn the housing market around by removing distressed homeowners from properties — without the pain of foreclosure — and reselling the properties to new, financially secure owners. The rehabbers would buy properties no one else wants, make the homes habitable and resell them to qualified buyers. Sadly, this policy keeps those people out.
Aside from the damage this policy does to the housing market and distressed homeowners, it is also antithetical to the prescription for a housing recovery and an overall economic one. First, it drives down home prices. When private investors participate in the process, prices get bid up. In fact, a certain percentage of Fannie and Freddie’s properties probably sell for more than they are actually worth when investors participate. Taking some of the bidders out of this process tamps down on the prices the housing giants reap for their portfolios.
Furthermore, fewer home purchases mean fewer jobs, and fewer home rehabs mean less work for small businesses. At a time when the rebuilding of America’s devastated communities is so important, Fannie and Freddie are putting workers out of business.
A new wave of foreclosures is expected this fall. These distressed homeowners need options, and Fannie Mae and Freddie Mac are limiting them. The FHFA and Congress must act to stop this policy. The cure for this job-killing, anti-small-business policy is simple: End the contractual addendum Fannie, Freddie and banks have included with short-sale and REO purchases (a property that goes back to the mortgage company after an unsuccessful foreclosure auction), and return to the legal framework that governed the housing industry until last year. The FHFA is obligated to unwind Fannie and Freddie, and that won’t happen with this policy in place. Congress must reassert its authority to make housing policy.
Removing this policy will unleash the private real estate investor market, which has likely taken more distressed homes off the market than all federal attempts to modify loans combined.
It’s time policymakers recognize this.
Than Merrill, star of the A&E television series “Flip This House,” is a real estate investor in San Diego.