Wednesday, September 14, 2011

Houses for Heroes and other ways to reinvent how the government deals with the 248,000 foreclosed homes it now owns

The United States government owns 248,000 homes as a result of defaults on government-backed mortgages (  MSNBC characterized the problem as follows:

“For sale or rent by distressed owner: 248,000 homes. That’s how many residential properties the U.S. government now has in its possession, the result of record numbers of people defaulting on government-backed mortgages. Washington is sitting on nearly a third of the nation’s 800,000 repossessed houses, making the U.S. taxpayer the largest owner of foreclosed properties. With even more homes moving toward default, Fannie Mae, Freddie Mac and the Federal Housing Administration are looking for a way to unload them without swamping the already depressed real estate market.”

In asking the question narrowly, “how to unload those homes without swamping the real estate market,” the government has been hobbled in trying to identify a solution.  In a welcome change, the government has asked Americans to tell them how to sell these homes without harming the housing market.  The problem has been difficult to solve for the standard problem solvers in the field.  Rather than approach this question as a standard problem solver – i.e. a bureaucrat, politician, or mortgage banker – I approach this question as an inventor.

Ask The Right Question:
For inventors, the critical first step is looking at the facts behind the problem we are trying to solve.  Usually – as is the case here – the underlying facts reveal a far different question than the one people have been asking.

The government never wanted to be the largest owner of foreclosed properties, but in becoming just that the government has stumbled into possession of a powerful tool to speed our economic recovery.  If the government unloads these homes at a pace barely better than “swamping the market”, it will sell them at a loss.  If the government can leverage these homes to drive economic recovery, by the time it sells them it will sell them at a profit.  The government can also use these homes to strengthen our commitment to the military without increasing the military budget.

By narrowing framing the issue as “how do we unload these properties”, the government is asking the wrong question.  The question the government should be asking is “how can we use these homes to make America (and its housing markets) prosper?”  With the question correctly framed, it becomes easy to find good answers and viable options.

“Houses for Heroes”:  Use The Housing Inventory To Ease The Return of American War Heroes Into A Poorly Performing Job Market.
The wars in Iraq and Afghanistan have seen countless heroic soldiers return to the country they served only to find they have traded their noble service for unemployment and even homelessness.  Those we trusted to protect our nation are surely the best tenants we can ask for in maintaining the homes for which the United States is now a reluctant landlord.

I propose a program whereby unemployed soldiers returning to the United States are given highly subsidized (or even free) use of a foreclosed home while they seek work for up to a year after their return, and the rent for some period of time after they find a job (a year seems to make sense) would be adjusted to make sure that their salary, after rent, was no lower than their military salary.  For those who were injured in defense of our country, the Veteran’s Administration should be given authority to extend those time periods as appropriate, in light of the impact of the injury on the ability of the veteran to work.

No child of a fallen hero should be forced to grow up homeless because of a parent’s ultimate sacrifice.  I propose that the foreclosed homes inventory be made available as free or subsidized housing for the children of those killed in defense of our country, under appropriate guidelines established by the Veteran’s Administration.

These temporary uses of the foreclosure inventory should not have a significant negative impact on housing prices.   Indeed, I would expect neighborhoods to see housing prices improve as the downward price pressure of an abandoned, foreclosed home is replaced by the stabilizing effect of a home occupied by the most trustworthy and noble of our citizens.  The program may also be used to permanently reduce inventory by making the homes available with an option to purchase.

While these uses appear at first glance to provide only an attenuated stimulus to the economy, closer consideration reveals a strong stimulus effect.  By facilitating the employment of highly trained returning soldiers, we are helping American companies latch onto years of military training and experience.  Similarly, foreclosed homes are far more likely to be found in economically hard-hit areas—precisely the places where are most promising, well trained employment candidates can make the biggest impact.  Military recruitment would also benefit from such a program. 

As a practical matter, all of these factors are far secondary to the most universal, apolitical, and intergenerational of all American values:   Expressing our gratitude for the freedoms that generations of American soldiers have risked – and too often given – their lives to protect.  We should take this unexpected, tangible opportunity to show the gratitude of our nation for past service, and extend a promise to the next generation of heroes:  When you come home, we will embrace and protect you, just as you protected us.

Unlock The Geographic Restrictions The Mortgage Crisis Has Imposed On The Ability To Move For Work:
My second recommendation addresses a critical problem impeding economic recovery:  A declining housing market keeps prevents workers from moving to take a job.  We should use the foreclosed home inventory to enable people to move to where their skills are most needed.  During the housing price boom, the labor market enjoyed strong geographic fluidity.  If an employer in Dallas wanted to hire a particular programmer who owned a home in San Jose, and that programmer saw the job as a great opportunity where his skills would be much better utilized, it was easy for the programmer to sell his home at a profit and move.  In the current housing market, the programmer would likely be underwater on his mortgage and forced to either pass up the new opportunity or walk away from his existing mortgage in order to take the job.  In either case, our nation’s prosperity suffers.  In the former case, the programmer keeps a job that is not the one he is best suited for.  In the latter case, his San Jose home will add to the inventory of foreclosed homes.  Even where a home has net equity, geographic fluidity in the labor market is impaired by the slow pace at which homes can be sold.

I propose a housing exchange program.  The government should set up a mechanism whereby companies or entrepreneurs with a bona fide need to hire an employee who lives more than fifty miles away can tap into the foreclosed home inventory to make that move happen.  There are many ways to implement such a system, including trading the old house for the foreclosed, new house or making the foreclosed, new house available to rent for free or at a reduced rate so long as the mortgage on the employee’s old house is kept current.  The mechanical details, such as adjusting the mortgage on the new house to prevent a gain or loss in net homeowner equity, are well within the skill set of those in the real estate field. 

I also recommend allowing – and encouraging – private holders of foreclosed homes to participate in this program.  Indeed, although certain regulatory changes may be required to facilitate or even compel participation by mortgage holders, the program could be extended to allow homeowners with negative equity to directly exchange homes with each other.  By improving the inventory of available homes, the reach and efficiency of the program would be greatly improved.

The government could also use this program to reduce the net size of their real estate holdings by requiring that the new (foreclosed) home being traded to the employee have a higher value than the old home being acquired by the government.  I recommend against imposing such a condition at the outset, as it would impair the amount of enhanced mobility that the program would offer to the labor market, thereby reducing the efficacy of the economy stimulus.   However, if the government were to allow private holders of foreclosed homes to participate, the private holders could impose such a condition.

Use The Homes To Stimulate Job Growth or Offset Budget Items the Government Would Otherwise Directly Fund:
The third concept provides the greatest direct cost savings, although it poses the greatest logistical difficulties.  Federal funds directly pay federal salaries and programs, and are used to subsidize numerous state salaries and programs.  I propose offsetting three kinds of federal expenses with creative use of the housing inventory.
Salary Offset and Incentives:  A powerful use of the foreclosed home inventory is to directly provide housing to government employees or those taking a job at the request of the government.  To provide concrete examples, the government has a strong interest in getting doctors to move to underserved rural communities and getting teachers to take jobs in inner cities.  By providing free or subsidized housing for at least the first year of service, such recruitment would be made much easier.  By including a portion of the housing value as salary, direct salary expenditures would be reduced.   Similarly, the need to build additional military housing and state student housing could be reduced by making available an appropriately located portion of the foreclosed housing inventory.

Commercial Office Space Replacement:  The federal and state governments, including K-12 schools and state colleges, are significant consumers of commercial office and meeting space.  The commercial real estate market is in far better shape than the residential market, and to the extent that the inventory of foreclosed homes is sold or utilized in a manner that impacts the real estate market, it is preferable for the impact to be concentrated on the commercial side.  I recommend that the government inventory of foreclosed homes be reviewed to identify properties that are appropriate to use as office or classroom space.  While the federal government can assert preemption as a way to avoid zoning restrictions, I believe that this program should be implemented in a way that complies with the local zoning laws.  Such compliance will significantly reduce the cost savings possible using this approach, but a disruptive change to the character of existing residential areas would have an unacceptably negative social and economic impact.  The foreclosed home inventory may be particularly suited for use as temporary office space.

Temporary Lodging or Hotel Cost Offset: Government employees incur significant costs for lodging while they travel.  For some employees, such as trial attorneys, lodging may be required for extended periods.  I recommend that the foreclosed property inventory be reviewed to identify homes that are appropriate to replace hotel stays of a week or longer (based on neighborhood, proximity to frequently used extended stay hotels and other factors).  Because of furnishing and janitorial considerations, such use should be limited to situations where control over the location can be assigned to a local government office.

These three uses of the foreclosed home inventory should not be the end of the discussion, but the beginning.  Once the question has been reframed as “how can we use this opportunity to best help our nation”, there will be no shortage of answers.   If the government views itself as an accidental landlord, it will reflexively turn to narrow, inefficient solutions.  By looking at the foreclosed housing inventory as an accidental opportunity, we can chose from a wide array of powerful solutions.

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