Posts Tagged ‘HAMP’

Could Wall Street Save the Housing Market: Part 2

Thursday, August 2nd, 2012

My recent column on the Huffington Post reported on the advent on Wall Street into the housing market as companies like Blackstone and Colony Capital commit billions of dollars to bulk buying bank-owned (REO) single-family homes.

I agree that there are pros and cons to this program. The clear source of popular resentment is that the equity lost by homeowners as their home values plummet will be recaptured by large investors when they go to flip the assets once asset prices start to stabilize. Given the low cost of leverage and the low acquisition prices, the large-cap investor wouldn’t have to wait for prices to get back to par in order to make their targeted returns. So, is there another way? Well, yes. Homeowners could stay in their homes. That’s why the Obama administration created the Home Affordable Modification Program (HAMP) which has saved approximately 802,000 U.S. homeowners from foreclosure as of April 2012 – a worthy achievement but far from the 4 million expected and not enough to make a dent in the housing problem. HAMP was tempered by the lack of lender participation in the program. Of HAMP’s $30 billion budget, thus far it has only spent $3.23 billion.

To go back to the investment firms, remember that part of the strategy is to avoid evicting people from their homes. In the best of circumstances, these homes would be rented to their former owners who would also have an opportunity to acquire the home as the exit strategy. Each of these firms has their own strategy but I’ve spoken personally to private equity firms that are making a good faith attempt to prevent people being ejected from their homes for a simple reason – it’s preferable and cheaper than having to re-lease these homes. What are the alternatives? We could let the bad loans sit on the books of financial institutions which can cripple the credit system for years or decades (that’s what happened to Japan in the 1990s); or foreclosed homes can end up being acquired piecemeal in one-off or small auctions which isn’t efficacious in bringing back an enormous market. The argument to be made is that the Wall Street may be that critical intermediary step before the consumer sector is ready to take back the housing market.

A good analogy is what happened in commercial real estate. In 1989, the market hit bottom because of the Savings & Loan crisis.  S&L’s made hundreds of billions of dollars worth of loans on commercial real estate and saw asset prices freefall after Black Monday. Between 1989 and mid-1995, the government stepped in under the guise of the Resolution Trust Corporation which closed or otherwise resolved 747 thrifts with total assets of $394 billion. At the peak in early 1990 there were 350 failed savings and loan institutions under the agency’s control. Just like the GSEs today, they organized bulk sales of commercial buildings and loans.  Who bought them? Large Wall Street firms. It was an enormous transfer of wealth, no question,  but it also brought a new professionalism to the industry – portfolio-level strategy, transparency in pricing and underwriting, a new skill in operations, managing supply and demand, and accurate reporting. Our industry was transformed.  By the late 90s, asset prices shot back up and reached record levels. In 2007, when the recession hit, the industry was affected but far less than it would have been had it not been for how it had evolved. We simply didn’t have the levels of overbuilding that we did in previous recessions. And, incidentally, Wall Street allowed the person on the street into the industry.  The level of public ownership of commercial real estate today is unprecedented. For the first time, your 401K and stock broker could invest on your behalf in commercial buildings. And REIT stocks remain one of the strongest in all of the equity markets today. So, there will be struggles but the housing market will certainly benefit from this — the rigor and reporting that Wall Street will bring to the single family sector which will help make it much better prepared to face future recessions.

Jafer Hasnain: The Housing Crisis: Where Do We Stand?

Tuesday, March 6th, 2012

With home sales increasing in six of the last nine months and prices still 30 percent below the peak, the housing market is quite confounding.  That’s the opinion of Jafer Hasnain, Principal and co-founder of Lifeline Assets, a private equity firm that invests in single-family homes.

In a recent interview for the Alter NOW Podcasts, Hasnain said that the nation has 10 million homes whose mortgages are seriously delinquent or even in foreclosure.  According to Hasnain, this is the shadow inventory, which consists of mortgages that are either 90 days late, in foreclosure or bank owned.  If you look at the next four or five years, that number will add up to between six to 10 to maybe 11 million homes.

When asked why President Obama’s Home Affordable Modification Plan (HAMP) didn’t work as intended – a program meant to help five million homeowners that saw only 800,000 sign up – Hasnain quoted the truism “The road to hell is paved with good intentions.”  As Hasnain sees it, the obstruction was in HAMP’s implementation.  Although HAMP brought down interest rates to as low as two percent, the real problem for many is that they had lost so much equity, participation simply was not worthwhile.  Because HAMP had no impact on the principal owed, homeowners still owed the same amount of money – which typically was significantly more than the house was worth in today’s market.  Many concluded that it made more sense to let the bank foreclose – a process that takes 700 or more days – live in the house for free, save money so they ultimately could pay the bank a fraction of what they really owed.

Hasnain pointed out that approximately half of all existing mortgages could no be re-underwritten today because of stricter lending standards.  In other words, half of all mortgages are potentially distressed, a fact that distresses Hasnain.  “That reflects society, and that reflects the potential to really crimp consumer spending.  I think housing is the number one, two and three issue right now.”  Part of the trauma is caused because, at one time, most people were convinced that they could always rely on the value of their home.  In the last few years, that balloon has been deflated to the point where we are now witnessing a failure in confidence.  This is a fairly unique problem that most people have never faced, one that calls for creative solutions — whether they come from the government or the private sector.

To listen to Jafer Hasnain’s full interview on where we currently stand on the housing crisis, click here for the podcast.