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Public policy and real estate part two: The housing policy debate we're not having

Real Estate Roundtable: In part two, Mark Stapp, director of the Master of Real Estate Development program, and Jonathan Koppell, dean of ASU’s College of Public Programs discuss the debate over the advisability of writing down underwater mortgages, the role of Ed DeMarco, head of the Federal Housing Finance Agency, and the future of federal subsidies for home ownership.

2012-09-25

Real Estate Roundtable: In part two, Mark Stapp, director of the Master of Real Estate Development program, and Jonathan Koppell, dean of ASU’s College of Public Programs discuss the debate over the advisability of writing down underwater mortgages, the role of Federal Housing Finance Agency head Ed DeMarco, and the future of federal subsidies for home ownership.

In addition to his leadership of the MRED program, Stapp is a faculty associate in the School of Architecture and Landscape Architecture in the Herberger Institute for Design and the Arts. He has been involved in planning, investing in, developing and consulting on real estate for 32 years. He is focused on the investing in and creating environmentally sensitive and socially responsible real estate development.

Koppell is the author of The Politics of Quasi-Government: Hybrid Organizations and the Dynamics of Bureaucratic Control (Cambridge University Press, 2003), where he raised the dangers presented by Fannie Mae and Freddie Mac and other hybrids due to their mixed mission and chronically weak regulatory oversight. He is regularly cited as an expert on the housing government-sponsored enterprises and related issues.

The Real Estate Roundtable series brings together academics and industry leaders to discuss real estate in context with the economy and community. See Part One

Listen: [podcast]

Read: The Housing Policy Debate We're Not Having

Jonathan Koppell: You made reference to the dense web of policies, most of which are federal policies, which have supported the housing market and have pushed us to look a certain way as a country in terms of home ownership. There’s some uncertainty – quite frankly maybe not enough uncertainty – about whether that’s going to persist into the future. That will make a difference. It’ll make a difference in terms of the relative economic return on rental housing versus building homes to sell. That’s hard to know and we’ll have to see.

We should be having a big policy debate in this country about whether we want to continue subsidizing the home ownership economy through mortgage interest tax deductions, through Fanny Mae and Freddie Mac and through various bank policies. We’re not having that conversation. Why we’re not having that conversation is because it’s almost too painful to have because the idea of removing those things is so horrible to contemplate, because it’s complicated and it would be painful for a lot of different people. It would change the economy. So what have we done? We’ve not had that conversation.

Even attempts to deal with the immediate problem – the eminent threat of foreclosure for many Americans still exists and many others are underwater has become focused in a very sort of strange way on the decision of one individual – the head of something called the Federal Housing Finance Agency to resist the Obama administration’s proposal to basically write down a bunch of loans. We can talk about that and what that means and what that’s all about. It’s a little bit Greek I think, to most people, but that this has become the sum total of our housing policy discussion is insane, to be honest. Whatever you may think about it, that Ed DeMarco’s decision is everything, that one person is standing in the way of … come on. It’s ridiculous.

Mark Stapp: It is. So what is your take on the issue of mortgage write-downsprincipal mortgage write-downs?

Koppell: The basic question is this. You’ve got a bunch of mortgages where the outstanding balance is almost certainly more than the house is worth. Many of those mortgages were purchased by, or guaranteed by Fannie Mae and Freddie Mac, which are government-sponsored enterprises. Once upon a time that meant that they were more or less, independent companies that had certain privileges granted to them by the federal government. That’s largely mythical at this point in all but law because they are 79.9 percent owned by the United States Government following the various bailouts. The reason why the 79.9 is actually important is because by law, that keeps these mortgages off the federal budget. Their liability is somewhere in the neighborhood these days, of $17 trillion. I haven’t checked the latest numbers, but something like that. It keeps them statutorily independent of the executive branch of the government.

This fellow DeMarco does not work for Obama. He doesn’t take orders from Obama, he’s not supposed to take orders from Obama and if he did, he wouldn’t be doing his job. Then you say, if he doesn’t work for Obama, who does he work for? And why would he not just go along with the President and his appointees when they say, ‘Look, you need to write down these loans. They’re not worth that much anyway. What’s the point of leaving them the way they are if it’s just going to result in a bunch of people foreclosing?’ You actually have to get in the weeds a little bit to understand this.

DeMarco’s job is to make sure that these companies, assuming we still regard them as companies, are doing what’s in their best financial interest, to keep them solvent. He’s supposed to make an evaluation of whether or not the actions that he takes as their regulator – Fannie Mae and Freddie Mac’s regulator – is going to keep them fiscally safe and sound. You could say, “What does that even mean when they’re already in hundreds of millions of dollars in debt to the government?” Well, it means that they need to be maximizing the value of their assets. This is what I was talking about earlier. This doesn’t make the companies evil and it doesn’t make Ed DeMarco evil.

They were set up to work that way and they worked well that way for a lot of years, precisely because they were intended to think that way. In fact some of the problems that came about is because they got away from thinking that way, or became mixed with other things. Often that was getting people into houses that some say shouldn’t have been there. There’s a degree of truth to this, but it’s also because they were trying to make as much money as possible and were taking a lot of risks instead of being safe.

There’s a lot of complexity here. What Ed Demarco has said is, “It’s not financially responsible for the companies, as companies, to write down these assets because they’re going to be worse off doing so,” because people are repaying these loans and so on.

There’s a really important point here. Nobody who works for the Obama administration or anybody else, has said that that’s the wrong way for Ed Demarco or anybody working for his agency to think about it. Nobody’s challenged that. Nobody has said, “That’s not your problem. You’re problem is getting Americans into homes they can afford,” or, “Your problem is to make sure that the housing economy recovers.” Nobody’s challenged that that’s his job. The challenge is they say, “No, no, you’re wrong. Fannie Mae and Freddie Mac are better off writing down these loans because ultimately there’ll be less foreclosures.” This all is about modeling what we think is going to happen.

Stapp: Right.

Koppell: Who’s right? I’m not sure I know who’s right, but the issue is not that this guy’s evil. It’s not that he’s subverting the President. It’s about what we think is the right thing for these companies. Now, you could have a separate discussion, such as, “What are you saying? They’re not companies – they’re owned by the government. This is all just nonsense.” I would actually agree with that to some extent. The reason why we’re having this conversation is because nobody wants to bite the bullet and say, “These are government entities and all of this liability that we’ve shifted from the budget – off budget – really ought to be on the budget and it’s all just a house of cards.” That’s all true, but then let’s have that discussion! Let’s not focus on whether Ed Demarco is a bad man or not because that’s noise, right?

The key question is whether we want to rethink the whole thing and readjust the housing market and get to the bottom of this. That’s why I say it’s a perfectly valid discussion to have. That’s the sum total of our discussion about housing policy in the United States, is whether the FHFA is letting Fannie Mae and Freddie Mac write down mortgages. It’s –

Stapp: It’s crazy.

Koppell: It’s crazy. I mean it really is. It’s kind of comical.

Stapp: Like you said before, painful. It’s complex and complex things aren’t good for discussion in a public forum. A lot of special interest groups are driving the dialogue or lack of dialogue – preventing dialogue from happening –

Koppell: That’s right.

Stapp: – and that’s tough, especially right now where we are in our political process.

Koppell: If you’re interested in politics or interested in the role of interest groups, it’s fascinating. You have this really surprising alliance, right? You’ve got all these folks who make money off of the mortgage process – and there are lots of them. People think banks, but it’s not just banks – it’s underwriters, it’s mortgage insurers, it’s –

Stapp: It’s a huge web.

Koppell: It’s a huge web of industries and they are aligned in some sense with a group of activists who are interested in keeping people in their homes and they have found themselves aligned, basically in a coalition of the status quo. It’s going to be very hard to deal with it and the surest sign that it’s going to be very hard is that nobody’s talking about it. It’s the biggest chunk of inertia in our economic recovery, clearly, unambiguously, and yet nobody’s talking about it. The President’s not talking about it. Mr. Romney’s not talking about it. Nobody wants to touch it because – mix metaphors as you want. It’s a toxic, third-rail, Gordian knot. [Laughing]

And so we have this carnival sideshow conversation about this random, interim director of an agency that nobody’s ever heard of and that’s our engagement, and then we leave it at that and talk about when Mitt Romney resigned from Bain or whatever.

So that’s the unfortunate thing.

Stapp: The other unfortunate thing is as a consequence of our—I wouldn’t say inability to talk about this, but the fact that we don’t want to, that it’s politically too difficult to talk about it—real problems are created at community, at neighborhood levels.

Koppell: Oh, it’s huge. It’s a combination of stasis and uncertainty because nobody knows how it’s going to shake out, and so you can’t make any decisions. If you think about it from a business point of view, what’s the price of these assets in the future? What’s the present value of this asset? I don’t know. I don’t know what the market supports are going to be a year from now or ten years from now. I don’t think the mortgage interest deduction’s going to go anywhere, but let’s imagine that it did, or let’s imagine that the support for the mortgage industry went away. Money becomes more expensive, prices go down, and because I don’t know what my asset is worth, because I don’t know what the supports are going to be for the purchaser a year from now, I don’t know what to do.

Stapp: There have been proposals by outside groups to legislators, etc., about ways to deal with this housing crisis, the underwater mortgages, and you know the problem is that underwater mortgage situation is a point in time. It’s not what they are today. The question is what are we doing about the rest of the community and about housing because, those prices go up. In fact that’s what we’re seeing. Prices more likely to go up then they are to continue to go down so these become pure points in time.

Koppell: That makes it easier to do nothing.

Stapp: Exactly. That’s what’s happening: you look at it and you go, “Eh. Prices are going up. Let’s not do anything because it’s going to solve itself.” The market’s solving it for us. I think we’re going to see business models change. People are going to begin making small shifts. I don’t think we’re going to see a large shift that changes how we do business. I think we’re going to see a lot of small shifts that collectively begin to push us towards a recovery. While this whole other dialogue that we have no control over is going on, the entrepreneurial element of real estate is looking at it and thinking, “Okay. What do I have control over? What do people want and need? I’m going to be offering something of value here – an approach that’s going to allow somebody to get something they otherwise couldn’t”

Koppell: Let’s end on an optimistic note. That’s what we, as human beings like to do, right? Today’s optimistic note is, “Look, if there’s one thing we’ve learned, it’s that radical change is highly unlikely.” I feel pretty confident that the rug isn’t going to get pulled out from any one of these public policies that makes the market look the way it is. That I know. I also feel pretty confident that there’s not going to be a huge stimulus to the economy any time in the next – choose a number – three to five years, so I don’t expect that there’s going to be another bubble. I don’t expect that there’s going to be some enormous turnaround that means that it’s going to be possible for me to make a huge profit by getting rid of a property in the next few years. So, I feel confident saying my return on investment is not going to be zero but it’s not going to be more than – choose a number.

Stapp: 75 percent or something –

Koppell: Right – something like that. That’s okay. That gives me enough information to make some decisions about what I’m going to do. If I’m going to sell, here’s a price that I’m comfortable selling at. If I’m going to build, what’s a reasonable return on a rental property? If I can clear X dollars per month on this property, that’s actually pretty good given what I think the economy’s going to look like. There may be enough certainty, even though there’s a lot of uncertainty. There may be enough certainty that people are willing to make some decisions.

Stapp: Yeah.

Koppell: Here’s the most anecdotal of data. If you drive around, I can tell you that I see projects now of people building additions, people rehabilitating houses and so on. A year ago that wasn’t happening. Now it’s happening. There are project going up. A year ago that really wasn’t happening. Now it’s happening. So I think that there’s enough certainty for enough players, that people are saying, “You know what? I don’t know exactly what’s going to happen but two years from now I’m not going to have any more ideas so I might as well do something now. Money is cheap now. Interest rates are low now. I might as well do something now.”

Hopefully that’s going to get the wheel turning a little bit faster each day and you’ll get some momentum out of it and it will open the door for people to have, as we’ve talked about over this conversation, for people to have a conversation and say, “what can I do differently so that I’m not in the same place five years from now,” because nobody wants to be in the same place five years from now.

Stapp: No, they don’t, and we see those small improvements! So, thanks for taking the time to talk to us.

Koppell: No, that was fun and hopefully next time we’ll have the solutions. [Laughing]

Stapp: Well, I’m not sure we’ll ever have all the solutions because it’ll be different next time –

Koppell: Right.

Stapp: – but appreciate your time.

Koppell: Great.  

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