Residential home values in the United States have fallen considerably from their highs in the mid-2000s. This has had profound effects on consumer wealth and spending, creating a significant drag on the U.S. economy. What is worse, this loss in values corresponded with a steep rise in unemployment, which started in late 2007, and has yet to fall considerably. The loss in home values has wreaked havoc on household finances, and bank ledgers, as the outstanding principles of the mortgages those banks hold and service all too often exceed the current value of the homes against which they are secured. This has proven a toxic mix, as foreclosure rates in residential homes in the United States have reached highs not seen since the Great Depression. Foreclosures have devastated families and whole communities, and the surplus stock on the market, often available at depressed prices, means the housing market suffers from a glut of stock, further depressing sales and values.
One of the features of this market is that the U.S. government has under its control a large quantity of foreclosed housing stock: over one quarter million properties. Since the federal government has guaranteed roughly 90% of the home mortgages currently being written, this number could grow if the housing market is not stabilized or the health of the overall economy does not improve. At the same time, there is increasing political pressure to end the federal government’s role in the housing market, despite the fact that there are no viable alternatives at this time to step in to ensure access to credit and liquidity in the housing market. Given the size of federal holdings, figuring out an effective way to manage and dispose of this portfolio of housing stock is critical to preserving home values, protecting the financial interests of local communities and governments, and invigorating the home mortgage market.
This white paper outlines ideas for managing this portfolio of federally owned properties in an efficient and effective way, based on policy responses to, and lessons learned from, prior historical precedents. The lessons learned from these precedents, their successes and failures, should offer insights into the best practices for addressing the current situation. These historical precedents are the following: first, the federal government’s response, through the Home Owners’ Loan Corporation, to the foreclosure crisis that arose during the Great Depression; second, the actions of the Resolution Trust Corporation in response to the Savings & Loan Crisis of the 1980’s; and third, the local response to the vacant properties crisis that grips New Orleans in the wake of Hurricane Katrina. To summarize, these lessons are as follows:
(1) Ensure an Adequate Return on Sales for the Federal Government by Holding Properties and Converting Them to Rentals until Housing Market Recovers; (2) Preserve Home Values to the Greatest Extent Possible; (3) Consider More Aggressive Preventative Strategies to Reduce the Number of Foreclosures in the Future, Even Incurring More Federal Debt if Necessary; (4) Give Organizations the Autonomy to Operate Flexibly and Adjust to Unexpected Conditions; (5) Align Employee Incentives with Organizational Goals; (6) Decentralize Operations to Allow Tailoring to Individual Housing Markets, Based on Detailed Market Data, and to Address Significant Regional Obstacles to Disposition; (7) Clearly Prioritize the Creation of Affordable Housing; (8) Partner with Neighborhood-Based Leadership, Resources, Creativity, and Initiative; (9) Ensure Local Government and Private Sector Entities Charged with Implementing Programmatic Objectives Have Basic Core Competencies; and (10) Allow Displaced Homeowners to Return to Former Homes.