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The merits of principal reduction, refinancing and rehab-to-rent

What should the federal government do to address the inventory of foreclosed properties?

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This is no ordinary single family market, and in most jurisdictions we will not reach price or community stability without active engagement by current and by once and future homeowners–with counseling support. With perhaps 2.5 million homes that have already been foreclosed, but 4.5 million more in serious default and perhaps 10 million underwater, dealing with already foreclosed homes without stemming the flow from the pipeline will stabilize neither prices nor communities. Clearly, the best solution where possible is to keep homeowners in their home through loan modifications. That will require much greater use of principal reductions, often with shared appreciation mortgages.

For homes already foreclosed, the diversity of markets and limitation of resources. In relatively strong markets, ordinary market clearing mechanisms may function adequately, if not fairly to victims of predatory lending. In markets with large numbers of distressed properties, only a neighborhood or community strategy is likely to make a difference over time. The REO-to-rent and rehab-to-rent approaches show promise, perhaps with new tools including counseling, extended leases, and purchase options with incentives. Various initiatives under the Neighborhood Stabilization Program (NSP) and by the National Community Stabilization Trust, among others, are paving the way, though the road is still narrow.

Further federal investment in Fannie Mae and Freddie Mac to scale the principal reduction, refinancing, and rehab-to-rent strategies is essential and may well cut the eventual cost to the taxpayer by stabilizing market prices and forestalling a downward spiral. For distressed neighborhoods, the federal government should provide additional tax or grant subsidies, but only targeted assistance tied to a longer term vision to stabilize communities.

Bill Kelly is President and Co-Founder of Stewards of Affordable Housing for the Future (SAHF).

Welcome to the BPC Housing Commission expert forum! This forum is intended to foster interactive and substantive discussion about pressing housing issues. Each month contributors from different parts of the housing sector will be invited to respond to a discussion topic. Guest posts will feature prominently on BPC’s website, as well as be shared regularly with Housing Commissioners to help inform their work.

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2012-01-20 00:00:00
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