Socializing Post-Foreclosure Rental Housing

An article in the Wall Street Journal on Friday Jul 22 indicates that the government is looking for ways to move foreclosed homes into the rental market. The market has already moved in that direction, and has done so despite, rather than because of, government policy. As the recent 2011 State of the Nation's Housing report from the Harvard Joint Center for Housing Studies documented, between 2007 and 2009, there was a net shift of 1.8 million existing housing units (mostly single-family) into the rental market, far exceeding additions to the rental supply from new construction.

Under an existing Neighborhood Stabilization Program, HUD already provides grants to local governments and nonprofits to buy abandoned or foreclosed properties. In announcing a "First Look Program" whereby grantees would have a right of first refusal to purchase foreclosed properties, HUD complained that local governments and nonprofits "often find themselves competing with private investors for real-estate owned (REO) properties."

Apparently HUD believes that private investors want to buy foreclosed properties in order to vandalize them or establish crack houses, rather than to perform—without public money—essentially the same functions expected of public and nonprofit owners. There may be some special purposes to which housing owned by local governments and nonprofits can be channeled that wouldn't be priorities for private investors. The current market situation may provide opportunities to acquire properties for those purposes. But that doesn't mean that purchases by private investors should be regarded as a nuisance or threat, rather than as an essential element in the restoration of market stability and in the provision of places for people to live.  Moreover, most NSP grants don't serve the sorts of unique constituencies that  would not be found in private for-profit rentals.

Delays and restrictions on foreclosures don't help to preserve the housing stock or stabilize neighborhoods. The supposed malpractices of lenders initiating foreclosures overwhelmingly consist of technicalities in the handling of paperwork, not unwarranted actions against faultless borrowers. The sooner that properties with defaulted mortgages--many of which are vacant and decaying—are returned to the market, the better, but government policies are prolonging the agony.

The Federal Housing Administration (FHA) insures mortgages for owner-occupied single-family properties (which, in the mortgage market, means properties with one to four units). There is also FHA insurance available for mortgages on multifamily rental properties. But FHA generally doesn't insure mortgages for single-family rentals.

Rather than putting the federal government into the business of owning and operating single-family rental housing or creating a new program under which the government would control use of foreclosed properties, how about just providing FHA mortgage insurance for single-family rentals. This should be done, however, with careful underwriting and appropriate (i.e., higher) mortgage insurance premiums.

July 25, 2011 -

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