Three Ideas that Might Help Resolve the Housing Crisis
March 16, 2012
Dear President Obama (and Governor Romney),
I know that you would like to be re-elected (elected) this year and you’ve probably been thinking about how you might improve the economy over the course of the next 8 months to better your chances (or what you would propose to do to stimulate the economy once in office). One of the biggest problems your administration (the country) has faced is how to resolve the housing crisis. Well, today is your lucky day because I have 3 suggestions that, in my estimation, would improve the housing situation in the US and provide you with talking points that will appeal to fiscally conservative independent voters around the country.
Here are my 3 ideas:
- Require mortgage lenders to publicly disclose all information on properties they own due to foreclosure (I wrote about why this delay is hurting American neighborhoods). Most importantly lenders would need to disclose the outstanding debt on the property. This way the investment community would be able to quantify the likely loss to the lender (and take away the lender’s motivation for keeping foreclosures off the market to avoid recognizing losses on their books).
- Allow individuals to invest in real estate directly from their IRA or 401(k) accounts. Instead of requiring that individuals move their money to a self-directed IRA run by an obscure, possibly fly-by-night, company, allow us to use our own money in our existing accounts to invest in real estate without tax penalties or excessive administrative complexity
- Permit individuals to purchase foreclosures, renovate and flip them to owner occupants with profits treated as long term capital gains for tax purposes. To qualify, the seller must demonstrate property improvements and the buyer must commit to owner occupancy for 1 year or more (similar to current FirstLook program and with Realtors verifying compliance or losing their license if they misrepresent the facts).
That’s it: (1) more transparency from lenders (don’t they owe us something after the way they’ve behaved?), (2) more freedom to use our own money to invest in housing rather than just stocks/bonds, and (3) lower taxes for people willing to invest in America’s neighborhoods.
I’m not a politician or a policy expert so I realize my approach is probably naive in some way but as a home owner, a taxpayer and a small real estate investor I think any one of these changes would have a positive impact on the housing situation and the country’s balance sheet. All 3 just might put the housing market back on solid footing.
I suppose Wall Street types will hate this because it would likely pull some money out of their high-profit casino but isn’t it time they took one for the team?
Thank you for your time and attention.
I think house flipping is not a good idea because it would deny home ownership plus it tends to drive prices up rapidly plus realtors are a greedy bunch!
There has to be a complete change in how we conduct the housing needs of this country.
There are too many scams going on.The banks realtors appraisors contractor gov reg ,particullary FHA ,Fannie,freddie the whole gammet is a loose cannon on a sinking ship.
I do agree banks need to come clean, but the solution is not simple.Keep trying
Thanks for the comment, Dad. Did you read the details on the parameters regarding home flipping? The property would have to be improved and the buyer would have to commit to owner occupancy so it should improve home ownership. The idea would be to get investors to fix up properties and make them ready for occupancy. This should improve neighborhoods and allow those who are investing to make a profit. Seems like a win-win to me.
What do you think of the idea to allow individuals to use money in retirement accounts to invest in housing rather than the stock/bond market?
Not a bad idea ,but not all people want to risk their savings plus a lot of people simPly don’t want to deal with withtoouch drama Dad
Your point 2 look like the way it works in Canada.
Invest in and for yourself
Martin – I didn’t know about this program. Thank you for sharing!
***** Disclosure: I am a lawyer who works at a large regional bank on distressed assets. This is solely my own opinion, and does not reflect the position or opinion of my employer in any respect. *****
Sorry, but these ideas are interesting, but ultimately unworkable or bad policy.
1. Requiring lenders to disclose granular info on their REO holdings will lead to more bank losses and further delay recovery. Hedge funds will use this information against banks to buy REO properties at the lowest price. In fact, banks are already required to appraise REO annually and adjust their book value based on the appraised values and report losses in their financials (accordingly). So banks are not holding REO to avoid taking losses, but rather to avoid dumping excess inventory on the market at one time. In terms of what “banks owe us”, don’t paint all banks with the same brush. Many (most) banks were responsible lenders. Their “crime” was to believe the same hype as the buyers, and to make credit available to them. People and legislators today are complaining that banks are too” tight” – meaning they are not applying the lax lending standards of2004-2006.
2. Allowing people to use IRAs and 401(k)s to invest in real estate is a nightmare. Plan administrators are not equipped to manage individual real properties. Their costs to do so would be astronomical. People have the ability to use self-directed IRAs to invest in real estate, as you mentioned. Your slur of the administrators of these plans as “possibly fly-by-night” is unsupported by any facts. People should do their due diligence on the administrators. If they are unable to do that, they are probably not savvy enough to invest in real estate. In fact, the biggest issue is that people are clueless when it comes to real estate — that is what caused this mess in the first place after all. Every sale in 2002-2007 had a willing (and usually overoptimistic) buyer on one side. This is a recipe for massive losses in retirement funds.
3. Permitting profits on flips to be treated as LT capital gains is also a problem. It would be challenging for an overworked and underfunded IRS to monitor whether these transactions qualified for this treatment. And if you understand underlying tax policy and philosophy, there is no reason to treat these transactions as LT capital gains. Further, I doubt that the tax treatment is what is preventing people from doing reno/flipor reno/lease transactions. In fact, the residential foreclosure sales are thick with investors, as I know from personal observation.
Kudos for proposing policy alternatives, and keep it up. But I don’t think these are workable.
Sachin, thank you for the reality check. I certainly don’t possess your expertise in this area so I appreciate your insight. I can’t quite swallow all of these arguments though. (1) I’m afraid I don’t trust banks to accurately appraise REO and write down losses to true market value so I don’t think that wipes away the motivation for banks to hold up inventory. (2) I do agree that we can’t paint all banks with the same brush. Perhaps you could help readers understand the differences that we ought to keep in mind? (3) I didn’t mean to “slur” self-directed IRA admins but I think it would be reasonable to require more IRA admins to offer a self-directed option. I have yet to find a self-directed IRA option with a track record that is easy to evaluate/understand. Couldn’t Fidelity or Vanguard or someone help by partnering with one of these firms so that investors don’t have to do so much due diligence to find a decent provider? (4) I agree that clueless people could lose money in real estate but in that case no one should be allowed to invest in stocks or bonds either – right? These assets are even riskier in my opinion and certainly more difficult to value. Plus, this is America (“is this Russia, this isn’t Russia” – sorry had to quote Caddyshack). Shouldn’t we be allowed to risk our retirement savings if we accept the risks and responsibility? (5) I see your point re LT capital gains – I guess I was thinking this would provide a short-term infusion of capital that would help get us back to normal market conditions and clear away more of the shadow inventory more quickly. Anyway, thanks again for these comments and your insight on the matter. Best, Justin