FDIC Archives - Real Estate News and Commentary

real estate Is Nationalized Housing the next step? Probably not.

However, if you would have told me a year ago that there would be discussion about nationalizing private banks; I would have looked at you as if you had two heads! However, recent economic events has many people talking about nationalizing this country’s private banks, including former Federal Reserve Chairman Alan Greenspan (who was reported by the media to say that nationalizing banks temporarily may be necessary).

Given that bank capitalization has been at risk due to devalued and toxic assets, some favor the Government taking over failing private banks to recapitalize and restructure them. The idea of vested Government control and ownership has many pros and cons, and there is no “map” to tell us where nationalizing banks would lead.

How bad is the problem? A recent Financial Times article (Insight: Time to expose those CDOs; February 26 2009) reported that $305B of the $405B Collateralized Debt Obligations of Asset Backed Securities issued between 2005 and 2007 went into default. One third of those CDO’s were from mortgage backed bonds, also called mezzanine CDOs. Although recovery rates for defaulted CDO’s in general are low, it is estimated that the recovery rate for mezzanine CDOs is 5%. In other words, $5,000 is recovered from every $100,000.

Although there is heavy debate of nationalizing banks, some argue that Government stock ownership (as in last week’s 40% purchase of Citigroup) is a form of nationalization such that the Government can apply pressure to accomplish its goals; while others talk of bank nationalization as a socialist inroad. Other critics have argued that the Federal Deposit Insurance Corporation (FDIC) has been essentially nationalizing failing banks for years. Although deposits at failing banks are insured by the FDIC, the FDIC manages the receiverships to liquidate the failing banks’ assets. Not quite the total control of and ownership that nationalization inspires, but the model has been effective in the past by tying up the loose ends of a private bank failure.

A further extension of the bank nationalization would be to nationalize housing. As foreclosures and mortgage delinquencies contribute to the sliding housing market, Government bank ownership could be used to nationalize housing to stabilize home values. Well, not the entire housing market, only the non-performing segment which contributes to the toxic assets losses. By assisting home owners in foreclosure or at risk of foreclosure through direct Government control and ownership might lower foreclosure rates, possibly reduce further real estate market loses and assist those losing their homes.

Rather than the Government entering the mortgage servicing arena, the ideal nationalized housing program (through Government controlled lenders) would allow struggling home owners to pay what they can afford. In return the home owner would give up some (if not all) of the future equity stake in their home when they eventually sell.

Would nationalizing segments of the housing market be the answer to rising foreclosures? Of course not. Nationalizing any industry is a precedent that puts the Government on a slippery slope. Unless the questions of responsibility, ownership, control and intention are clearly defined, the unintended consequences of nationalization can swallow any industry- not to mention home ownership.

Original published at https://dankrell.com/blog/2009/03/03/nationalize-housing/

By Dan Krell

Everyone is talking about government bailouts these days, so how about bailing out the real estate industry? Ok, now that I have your attention, let’s consider a plan to stabilize the economy. Many agree that housing is a key indicator to our economy; so in an effort to stimulate the sluggish real estate market, Realtors among others are looking for solutions.

In an effort to stabilize and invigorate the real estate market, the National Association of Realtors (NAR) unveiled a four point plan in October. The plan is a proposal to Congress that includes eliminating the repayment requirement of the home buyer tax credit (an incentive created as part of the Housing and Economic Recovery Act of 2008), making higher mortgage loan limits permanent (also created as part of the Housing and Economic Recovery Act of 2008), prompting the US Treasury to compel banks to increase consumer lending, “improve the short sale process and expedite REO (homes owned by banks) sales,” and preventing banks from conducting real estate brokerage (NAR.org).

Additionally, rumors of a possible U.S. Treasury buy down of mortgage interest rates were floating around last week due to media reports linking the possible short term incentive plan to a November meeting with representatives of the National Association of Realtors (NAR). In response to these reports, NAR president Charles McMillan issued a statement saying, “We strongly encourage the Treasury to move quickly with its plan to lower interest rates to encourage current buyers to act rather than continue to wait” (Realtor.org). Although the NAR would like to have the subsidized interest rate buy down for home buyers, it is unclear how such a plan would be applied if passed by Congress.

Unfortunately, persuading people to purchase homes may only be the lesser problem of the current state of the real estate market; the greater problem may be perceived value. Even with current tax incentives and relatively low interest rates, many home buyers feel the economy is uncertain and continue to wait for the real estate market to bottom out.

Another angle on the problem was approached by Sheila Bair, Chairman if the Federal Deposit Insurance Corporation, who proposed to help home owners in danger of losing their home through foreclosure. This Fall, there were media reports of her idea to possibly use funds from the initial $700 billion rescue package to stem the tide of foreclosures, which could help stabilize the real estate market.

However, the dilemma in the present market place is not localized to the real estate market. Much like the U.S. auto industry, value not affordability is a main factor; providing incentives to purchase items perceived to have lower value does not always increase sales.

Why not a two pronged approach to the problem, provide incentives to home buyers and prevent foreclosures? There is no simple solution, as the problems are many, deep and wide spread.

Unfortunately, debate, dissention and criticism among policy makers continue to stall any clear path to recovery. Additionally, there is no guarantee that any implemented plan will be successful. Time will tell us if incentives spur home buyer activity and if delinquent home owners continue to be delinquent (even with renegotiated mortgages).

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of December 8, 2008. Copyright © 2008 Dan Krell.

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