As the housing crisis enters it's 5th year, there's still no final solution in sight - other than just living through it until it's over. (Whenever that may be)
The problem is that the secondary mortgage market, which is the vehicle for mortgage financing in the U.S., has many different parts and many different players, who each have a variety of different financial objectives. And these players operate as separate entities.
Some, such as Fannie Mae and Freddie Mac are under direct government control, but many others are private business entities, including banks, mortgage lenders, insurance companies, and a wide variety of other investment groups such as pension funds, who've invested in mortgage backed securities. Each group has it's own idea of what a workable solution should look like.
The government controlled entities own a large percentage of foreclosed homes. But even as big as they are, they only account for about one-third of the inventory of foreclosed homes. They are merely one piece of a very complicated puzzle. Coming up with one solution that would be agreeable to the variety of secondary market players is simply impossible.
One idea that's been discussed for months now has been the idea of putting Fannie and Freddie houses into service as rental property. But when you're talking about 200,000 foreclosures, which are not evenly distributed across the nation, you run the risk of ruining some local markets by causing home prices to fall further. And who's gonna manage those properties? There's never been a model for managing thousands of single family homes in a single rental portfolio.
Most investors who own and manage single family rentals are relatively small companies or "mom and pop" investors. Unless Fannie and Freddie can unload these homes in chunks of thousands, it would take years to put most of them back into service as rentals. A large number of available rentals in one general area could ruin the existing rental property owners by forcing rental rates to go down too much.
Meanwhile, banks and mortgage lenders are fighting to stay in business. They don't have the luxury of a government that will print money and hand it to them. (where foreclosures are concerned anyway). In spite of Bernanke's efforts to help the biggest banks, there are thousands of smaller banks and mortgage lenders that must make a profit to stay in business. They simply can't afford to convert foreclosed properties to rentals, and they don't want to cut selling prices any more than is absolutely necessary, so that they can minimize their losses.
One of the biggest problems with finding workable solutions is the fact that businesses like insurance companies and pension funds had invested heavily in mortgage backed securities. This was one of the primary ways in which funds were raised for the mortgage market to lend to home buyers. If you simply decide to write-down the principal on delinquent mortgages to "save" homeowners from foreclosure, you could wipe out a teacher's retirement fund in the process. It's not a pretty picture. At the bottom line, the mortgage crisis touches virtually every american to some extent.
And if you decide to forgive mortgage principle, or simply decide to re-write the terms of the original mortgage contracts signed by buyers and sellers, it's highly likely that the U.S. will never see much private investment in the mortgage market in the future. After all, if you loaned your brother-in-law $20,000 to buy a new car, and after doing so, he decided to only pay you back $10,000, would you be willing to loan money to him again?
Burning investors to save home owners is not a very good trade off when you consider the damage it would do to the future of the housing market. The lack of private investment has already made the U.S. taxpayer the only real mortgage investor in town as of 2012. Without government backing, there would be virtually no formal secondary mortgage market at this point.
So what's a politician to do? What fix if any is the real option that everyone involved can agree on? While there are many ideas being kicked around, none of them is workable for every group involved in this mess.
The only likely solution is the one that could be the most difficult to implement and take longer than anyone wants to think about. But it is the only one that all parties involved could agree on - full employment. If we can get our economy rebuilt, and get millions of Americans back to work, the housing market problems would eventually solve themselves.
The only real solution is to get the economy back on track, get everyone back to work, and then folks will be able to make their mortgage payments or buy a home. Only then can the foreclosure tide be turned back.
Hopefully the "presidential wanna-be's" of 2012 can come up with an employment solution that will be more creative than the one that finally ended the great depression and put everyone back to work after Japan attacked Pearl Harbor in 1941.
Donna Robinson is a 16 year veteran of the real estate industry and a staff writer for RealtyBizNews.com Her experience spans all phases of residential real estate, including licensed agent and rehabbing fixer-uppers. She is an active real estate investor who also provides coaching and consulting services to other investors. To discover how you may benefit from her expertise, contact her at [email protected] and request a free PDF copy of her latest book on residential real estate.