What should the federal government do to address the inventory of foreclosed properties?
View the full forum here. Thinking in only a single dimension (finance) won’t solve the foreclosure inventory problem, because when these homes go through foreclosure, a fundamental duality (owner = occupant) is sundered, and it can be put back together only if we innovate in three dimensions simultaneously:
- New tenure form, that creates a pre-ownership rental arrangement giving occupants legitimate aspirations to earn future homeownership through service as their means of building equity.
- New operational model, reinventing the passive tenant/ active landlord stasis into a more collaborative format that enables us to use web-based technology to make management much more efficient.
- New financial forms, transferring at speed, in bulk, to socially entrepreneurial parties in bulk whose incentives are aligned with society’s.
Here’s how to do it.
- New tenure form. An empty single-family home is an inert risk magnet. It’s easy to break in to and vandalize, its yard becomes littered, and it doesn’t maintain itself. It’s physically designed to be occupied by someone who takes care of it. But the 3,000,000 households who used to be homeowners have no cash equity. So we create a new tenure form that motivates them, a contract for future homeownership, combining rental’s low entry cost with homeownership’s responsibility and upside potential. Move in residents at affordable rent; sign a multi-year option to purchase at formula prices; package that with convertible assumable financing; and allow the occupant to ‘earn’ home equity by services rendered.
- New operational model. Professional multifamily property management operates on site specificity (a dedicated staff) and resident passivity (landlord does everything), both of which work best in large developments and fail completely in multiple individual locations. So we create a help-do-it-yourself tenancy, where residents who cut their own grass, clean up the property, and do minor repairs (based on remote-access viewing from a call center) can economic benefits convertible into purchase equity. Install webcams and similar in-house smart sensors (and have the resident agree on a privacy waiver for their use – occupancy in affordable housing is a privilege, not a right), and use these remote systems to signal a hub-and-spoke centrally dispatched major maintenance staff.
- New financial structure. Sales using classical debt-equity structures will produce terrible results for the government – poor property management, flipping, distressed pricing, and other practices that accelerate neighborhood destabilization. Fast execution requires sales in bulk; mission-oriented buyers won’t have capital in bulk. So we finance them with public-private recovery partnership modeled on the Resolution Trust Corporation. Use large pools, public-private partnerships where the government provides financing and owns a significant chunk of the upside, stewarded by entities trustworthy on both economic and mission grounds.
All of this is not just abstract theorizing; it’s been fully detailed in a comprehensive 75-page business plan, citing particulars and examples from around the nation and the world, that we submitted, on behalf of the Housing Partnership Network, to the Treasury’s Request For Information on what to do with the GSE inventory. If you’d like a soft copy, email me at [email protected]
David A. Smith is the founder and chairman of Recap Real Estate Advisors.
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