From a small northwestern observatory…

John K. McIlwain is the Senior Resident Fellow/J. Ronald Terwilliger Chair for Housing at the Urban Land Institute (ULI) in Washington, D.C.  I don’t necessarily agree with everything he says, but he stimulates some interesting thinking in a piece this week titled “Fixing the Housing Markets:  Three Proposals“.  (click on the title to link to the article itself.)

In summary, he proposes:

1.  Renting federally held REO

2.  Creating a mortgage interest credit

3.  Divide mortgages for underwater homeowners into a “paying” first and a “delayed” second.

He admits that in the current political climate, none of the above stands a ghost of a chance (nor would any other solution, good or bad), but even though I might disagree with some of what he says, I’m a firm believer in the old In Search of Excellence adage:  ready, shoot, aim.  Really excellent organizations (and government entities — which are rarely even CLOSE to achieving excellence) have a proclivity for doing SOMETHING.  The Marine Corps calls it the “70% solution”, which dictates that you attack as soon as you think you have 70% of the information needed for success.  Why not 100%?  Because fate favors the side with the initiative and momentum, that’s why.

So, please indulge me for a moment to comment on McIlwain’s proposals, but DON’T take my criticism as an indication that I wouldn’t vote in favor of doing exactly what he proposes, because in the current climate, a half-good idea is probably better than no idea at all.

1.  Rent federally held REO — Well, even McIlwain admits (or at least implies) that the government is a terrible landlord, so he would propose turning this over to the private sector via pools of “privatized” REOs.  What he’s essentially saying is to sell these REO’s (currently about 250,000, and expected to grow to a million) to investors with the caveats that they be held off the market as rentals for a period of time, AND that there be adequate maintenance to keep them from turning into slums.

My ONE disagreement with this is that less government involvement is usually better than MORE.  Plenty of investors stand ready to buy REOs right now, and the resale market is sufficiently poor that these investors recognize they have to be in it for the long haul.  Local planning ordinances are usually adequate vis-a-vis slum prevention IF they are enforced properly (as is not always the case).  There is no reason to believe that additional Federal caveats would improve the situation.  In short, this is actually being accomplished already, and deserves facilitation by the government, not regulation.

2.  Mortgage interest credit — McIlwain notes, and we concur, that the current mortgage interest deduction benefits taxpayers earning over $100,000, but hardly those earning less.  He suggests replacing this with a flat 15% tax credit, which would have the double-barrelled effect of raising the effective tax rate on those earning over the 15% marginal break-point, but directly benefitting dollar-for-dollar those below that break point.  It’s an intriguing idea, but would require the Realtors’ and Mortgage Bankers’ buy-in.  In today’s troubled market, it’s difficult to see how they would agree to anything that tinkers with the status quo.

3.  Divide mortgages for underwater homeowners into a “paying” first and a “delayed” second.  As much as I like this one on the surface, it ONLY works for homeowners who plan to stay in their houses until prices rise (on average) about 20%.  We don’t see that happening for quite a few years, so this essentially just kicks the can down the road a bit.  Even that, though, is an improvement over the status quo, and keeps homeowners in their homes for the time being.  The real problem, of course, is how to deal with the “delayed” paper on banks books.

In short, McIlwain’s proposals at least stimulate some conversation about solutions for the terrific vacant REO problem.  One big issue is lack of credit for suitable property managers — banks are loathe to loan on “second” homes today, and investment property (REOs turned into rental homes) is a troublesome loan to get.  I would propose that the agencies/banks holding paper on vacant homes simply privatize it immediately — if a bank holds a $100,000 loan on a vacant house, then a reasonably creditworthy investor who is willing to start amortizing that loan should be able to walk in, pick up the keys, and walk out the door.  Sure, this would violate all sorts of down-payment caveats in place right now, but it would get interest payments moving again, provide much-needed rental housing, and get some local entrepreneurs busy managing otherwise dead assets.