Please find below a brief proposal I have put together on the issue of foreclosure prevention and housing market stabilization based on what I and the team at HausAngeles as well as our colleagues, clients and strategic partners are actually seeing (and not seeing) on the ground in Los Angeles/Southern California. I and we do not claim to have all the answers on this “massive issue”. Nor do we claim all of the ideas below are mine or ours (please see footnote 1: acknowledgements). However, refining and executing on some or all of these ideas will be a key focus for me and the team at HausAngeles for the foreseeable future and until the housing market stabilizes. Our primary geographic focus is Los Angeles, but we plan to share learnings and information widely and freely to maximize impact at the ground level.
Preventing Foreclosures, Helping Consumers and Accelerating the Stabilization of the US Housing Market
Background and Context
I am the former Chief People/Administrative Officer and CEO Chief of Staff of Indymac Bank, who found herself at the epicenter of the mortgage and housing crisis since mid-2007. I resigned from Indymac after the FDIC placed the company into conservatorship, but decided to continue to focus on the housing/real estate sector where I saw and continue to see tremendous opportunity for positive impact, both personal and professional.
As I have gotten deeper into the real estate market and understood the reality on the ground on foreclosures[1], I have discovered numerous untapped and under-tapped opportunities to better help consumers manage their financial issues/life transitions, prevent foreclosures, reduce lender/investor losses, and help the housing market “find its bottom”. I strongly believe the housing market reaching bottom (or close to it) will mark a crucial turning point in our economic recovery.
Two interesting and important characteristics that I believe many of these opportunities share are:
1. Many (if not most) of the proposed initiatives actually help consumers, lenders/investors and the US economy. This alignment of interests is historic as these stakeholders often have competing objectives, especially in times of crisis;
2. Many of these opportunities require government coordination and support to work effectively and expediently, as key implementation challenges are common across industry players and/or require government support/regulatory changes.
Untapped and Under-tapped Opportunities to Help Consumers, Reduce Loan Losses and Accelerate the Bottoming of the Housing Market:
1. Ensure every homeowner in trouble who can realistically afford to continue to own their home with a modified loan, gets one as soon as possible
* One of the big reasons a large percentage of borrowers in trouble currently don’t get timely help via a loan modification is literally because they don’t respond to letters from their Bank. It’s not difficult to understand this behavior: consumers delinquent on payments are scared to open/respond to letters from the very organization that they owe money to (which they are not sure they can pay back as promised).
* On the other hand, there are thousands (likely millions) of licensed professionals (e.g., realtors, financial advisors/planners) already living in the same communities as the borrowers in trouble…who are not being leveraged to solve this communication problem.
* So let’s leverage these licensed professionals on the ground to ensure we have evaluated every borrower who is behind on their mortgage to see if there’s a way to realistically help them retain ownership of their home[2].
2. Turn more owners into renters:
* In times of crisis, it’s critical to prioritize what’s most important. My belief is that safety and family are more important for homeowners in trouble than ownership, given the seriousness of the crisis we are facing.
* As a result, I believe we should implement programs that turn some current homeowners into renters without making them move e.g., by transferring ownership of the homes they are living in and love to investors who are looking for income earning assets.
3. Implement systematic, lender supported short sales:
* Where it is not possible for the current homeowner to continue to own their home, we should avoid the foreclosure process (which is painful, time consuming and expensive) and instead facilitate the sale of the home with the borrower and lender working as partners instead of adversaries.
* As someone in the real estate business I can tell you that getting a short sale executed right now is nightmarish. There are no industry standards and most lenders are not set up internally to properly approve/manage short sales. Yet short sales nip the foreclosure process in the bud and are better for homeowners (who would have the opportunity to adjust their housing reality to their economic reality and prospects with greater dignity and respect), lenders and the US economy[3].
* Since systematic, lender assisted short sales are a lower cost option to foreclosure, it may be possible to divert some of the cost savings back to consumers to help them with their life transition (e.g., for relocation and/or other expenses related to their move/life change)
4. Implement rent to own programs to expand demand
* For families who do not have enough saved to make a down payment or qualify for a conventional mortgage but who have jobs/steady monthly income there is an opportunity to create future home ownership opportunities through creative rent to own program designs
5. Expand the nation’s affordable housing stock:
* In many cities across the country there is currently an acute shortage of affordable housing and the existing affordable housing stock is in poor condition. In Los Angeles (where I am personally involved), as an example, we are embarking on a 25 year plan to redevelop our ~10,000 public housing units. Such redevelopment and development programs will take decades and cost billions.
* Why embark on that costly and time consuming process, when we have an excess supply of housing nationwide already? Instead, let’s turn some of these currently empty/lender owned properties into affordable housing and bring hope to those that sit at the bottom rung of the economic ladder in our society.
* I believe Fannie Mae and Freddie Mac REO’s (which are currently being held on these entities’ balance sheets due to recent foreclosure moratoriums), or a significant portion of them, are likely best suited for this purpose. Some of this newly created affordable housing could be transferred to public housing authorities across the nation for management/administration, while some could be sold to investors as income-earning Section 8 or other affordable housing.[4]
Thoughts on Implementation
Given the seriousness of the current housing and economic crisis and my view that housing reaching a bottom will mark a crucial turning point in our economic recovery, I believe a cross-functional, multi-agency, multi-lender task force/team should be put together with a goal of clearing the market of the current total inventory of bank/lender/investor owned single family properties over the next 12 months.
In other words, let’s do whatever we can (after agreeing on some basic principles and philosophies) to try to have the housing market bottom by the end of 2009/early 2010. Once the current inventory has been cleared, we can focus on efficiently clearing the market only of new inventory (which should hopefully be at lower levels with the help of the President’s job creation plan and the effect of some of the above described programs).
Concluding Thoughts
I believe there are 2 key flaws in our current approaches on foreclosure prevention and clearing the market of troubled real estate inventory. First, foreclosure moratoriums, although well intentioned, only “push the ball down the road” to be dealt with at a later time i.e., these moratoriums are reducing supply today and are likely to prolong the duration of home price declines. Second, I believe there is an excessive focus on home ownership as a primary goal, whereas I believe we are ‘beyond ownership’ as a country. Dealing with the housing crisis should be about safety and family, and about reflecting American families’ actual economic reality in their housing reality (as gracefully and kindly as possible). These core principles are a foundation of this proposal.
[1] My views/ideas on foreclosures, REO’s and the real estate market reflect key input and insights from: Tony Ebers, Chief Operating Officer (Indymac), Eric Friedman, SVP Default Management (Indymac), John Olinski, EVP (Indymac), Ron Bergum (CEO, Prospect Mortgage), and Ron Garber, CEO, shortsaleplan.com
[2] Note: The Hope Now alliance does not include individuals including licensed professionals
[3]For example: Short sales result in an ~2year credit impact for homeowners in CA vs. ~5 years for a foreclosure. Also, short sales are significantly less expensive than foreclosures (e.g., legal fees, home damage) and don’t have the reputational stain of foreclosures. Finally, short sales in a declining home price environment result in significantly less loan losses by accelerating the timing of asset sale
[4] I should note that I believe any new affordable housing created should come “with strings” i.e., individuals and families should be committed to learning and earning their way out of government subsidized housing within a defined period of 3-5 years to be eligible to move into the new housing.
