Fannie Mae and Freddie Mac collectively insure the majority of US home mortgages. The total value of those portfolios, or should we say the current estimated value of those foreclosures, is $1 trillion. That seems to be the new darling number: $1 trillion. It’s released very casually these days. Nobody knows what $1 trillion means; we only know that it is a lot of money. That’s more than $3,000 for each of the 311,000,000 US residents. That’s a big number.
To put it in perspective, this is what $1 million and $1 trillion look like on paper. It is what I call “paper economy” or “paper politics”. There is nowhere you can go to touch or see it; you just see it on paper or in the media and you believe it exists. Think of it as 1,000,000 (times) 1,000,000.
One million dollars: $1,000,000
One trillion dollars: $1,000,000,000,000
With that number in mind, let’s take a look at some numbers that are a bit more understandable. In 2010, there were 2,825,637 distressed US properties as reported by the US Foreclosure Market Report TM. Each of these had a foreclosure filing, meaning they were: posted for foreclosure, had a notice of default, or were scheduled for auction or bank repossession. These are staggering numbers. This number would have skyrocketed to over three million were it not for the controversy surrounding loan documentation that slowed foreclosures during the fourth quarter.
With the downturn in the economy, this number will continue to grow by as much as a quarter million a month, perhaps through 2011. Fannie and Freddie are looking at an additional 3 million pending foreclosures. They don’t have the money or the technology to manage it. Money does not exist; it will have to be created on the good faith and credit of the US and its taxpayers.
As we have consistently seen since the dawn of the subprime era, there continues to be mismanagement, mismanagement, and redundancies in the process. All of these inefficiencies cost time and money and create more frustration and discontent in the system. It is essential that a system and a new set of tools be created to manage this process. Economic concepts and theories aside, the only practical way this situation can be handled is to break it down into smaller components and look for creative and perhaps unconventional public and private solutions. We are thinking about the problem and throwing money at it, but we haven’t created the infrastructure to manage it properly.
In the short term, Fannie and Freddie can do little more than keep the plates turning. Unfortunately, that requires a great deal of energy and concentration, which means the solutions won’t be easy. The problem is so big that the tendency is to just want to draw a line at the bottom of the ledger and start over. That won’t happen without shaking the shaky foundations of the economy, and Fannie and Freddie can no longer be funded by the Treasury. We, my fellow taxpayers, are net depositors of the Treasury. I can remember a couple of times when the Treasury sent me a check, and that was an economic stimulus tactic with a political punch. Don’t look for the next check in the mail. National prosperity is ours to enjoy and the national debt is ours to service. Like many Americans who mortgaged future earnings on continued prosperity, the government also incurred deficit spending. At some point, someone has to pick up the check. It’s time to put politics aside and do what needs to be done. Regardless of your political views; conservatives, liberals and moderates are all in the same boat. Leaks must be plugged or we are all in danger. We need practical solutions.
A partial short-term solution is to make Fannie and Freddie the newest and largest landlords in the country. These balance sheet liabilities are real assets and should be used accordingly. If you don’t have financial problems and are not in danger of foreclosure, should you worry? Let’s put it this way, every man, woman, and child in America is betting $3,000 on the outcome of this single number. For our children it will be like a tuition loan that they are paying to their parents. Hopefully the lessons have been learned and retained.
It is recognized that not all foreclosed properties are ruined. Some of them are well maintained and their market value is a sure thing. This is only a small part of the portfolio, perhaps ten percent of the 3 million foreclosures. The other properties are in various states of disrepair. The homeowner does not have the financial resources to maintain them. We have seen the unfortunate results when entire neighborhoods and subdivisions incur high rates of foreclosures. Real estate values and consequently tax revenues to local and state coffers decline. Regardless of whether the economy trickles down or trickles up; the real estate market needs to be fixed. The foundations of the economy must remain firm to support what is on top of them.
Since we all own a part of the growing national debt, including this part, we have in a way become owners of each other. So what do you want to do with your share of an emerging American ghetto? Would you go next door, mow the lawn, and plant some flowers to preserve the integrity of your neighborhood? If you don’t, if someone doesn’t, your oasis may be surrounded by wasteland. If you don’t believe it, drive through some of these communities and talk to friends and family who live in them. When there is no occupancy or pride of ownership, there is little or no maintenance.
Short term, Fannie and Freddie have to sort out. The economy will not recover enough to revive housing markets in many states for years to come. If we want to keep the floor from falling in, they can’t tear down a million or two houses and call it a day. Some money, occupation and maintenance is better than nothing. Where are all these people going to live once displaced? They’ll be paying rent somewhere, so why not collect the rents these troubled assets can generate? The debate is over; we need some serious solutions now.
In communities where there are no real-time sustainable solutions, it can lead to steady and irreversible decline. Bulldozers may scrape up the landscape and accountants may end up drawing a line at the bottom of the ledger, but their share of debt won’t be wiped out so easily. Eventually, the credit will not be exchanged for the product or service as freely as before. Someone will have to pay the bill. Guess who it is?
Fannie and Freddie are the gatekeepers, the keepers of the foreclosures, and they need at least four things:
1. Time – to solve problems – time is running out.
2. Money – [this must included strategies that are vested in the outcomes].
3. Creative and perhaps unconventional resources and solutions from the public and private sectors. Solutions must be sustainable and global enough to address all related problems.
4. A new electronic and paperless system to manage and archive the entire real estate transaction. Fannie and Freddie will have to lead the way in reforming a disparate system into one that fully integrates this market.
We threw money at the problem and sold it hoping it would heal itself. 21st century electronic solutions that make the real estate process more manageable and move it forward are essential. Existing real estate process tools and resources are inconsistent and grossly inadequate to manage this process going forward. It is the best time for a revolution in the way real estate transactions are managed and delivered to the investor.
If we foreclose on Fannie and Freddie, what replaces it? Many of the same faces that populate your rows will appear in the new entity. The mission may be redefined, but the focus may not be. We need some ideas and resources that identify all associated problems and act on them. We need some good women and some good men with the tools and the motivation, and we need them fast.
Party platforms and foreign wars are political issues. The recovery of the real estate markets will be the base of any sustained recovery of the financial markets and the economy. That’s a practical issue, and one that should get the core population on the same page. We “live in a house of cards.” I’m sure you know that expression. This article is not suggesting that the sky is falling; however, it should sound an alarm that focuses everyone on the foreclosure storms sweeping the country. It’s not always predictable where they’ll strike next, but we know it will. And when they do, we must rebuild accordingly.
