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It’s old news that federal housing agencies need better ideas about what to do about the foreclosure crisis.  The new development is that they realize it and have issued a blunderbuss “RFI” (request for information) seeking ideas from anyone willing to write in by September 15 describing business structures for the government to off-load foreclosed properties it is holding, particularly in “large scale transactions” to deal with the scale of the problem of lingering “inventory.”  See here.   An RFI is something short of an RFP (request for proposals).  Indeed, this new RFI is careful to note the distinction and also that there may never be a call for actual proposals.   So let’s not get too excited.  Furthermore, the problem of the continuing foreclosure crisis seems to be less about ideas than about will to act.  Most disturbing, the RFI does not even allude to the possibility of beefing up foreclosure prevention as an important way to stem growth in the volume of unsold and vacant foreclosed homes.

So first, what is the government looking for?  Specifically, the Federal Housing Finance Agency (FHFA), in consultation with Treasury and HUD, seeks new options for selling foreclosed one-to-four unit properties held by Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA).   Bulk sales might be for resale, rental or demolition.

FHFA is conservator for Fannie and Freddie, the government-sponsored entities (GSEs) that predominate in the secondary mortgage market and that went belly-up in the foreclosure crisis and were taken over by the government.  FHA, a government agency funded with premiums rather than tax dollars, is the largest insurer of mortgages in the world.  Together, these three entities held over 250,000 foreclosed homes as of the end of June, about half of foreclosed residential inventory.  Much of this inventory is moldering, causing havoc in neighborhoods and keeping home prices depressed.  Another 830,000 homes are supposedly in the foreclosure pipeline heading toward GSE or FHA ownership.   “Shadow” inventory, meaning homes expected to end up sold at foreclosure, continues to cast a pall over the housing market and economic recovery more generally.   Given the potential size of the problem, FHFA particularly wants proposals to deal with $50 million to $1 billion in assets at a time, and it has the power to go forward without the need for deadlocked Congress to act.

So it is worth coming up with new ideas, even if belatedly, or recycling old ones, and some are excited at the prospect.  Mortgage News Daily, for example, has relentlessly covered ideas for using foreclosed homes to bring down prices in the rental market, including rentals to “previous homeowners.”  (Comment:  What about keeping them in their homes in the first place, perhaps as renters, which those without equity effectively are, but at more affordable rates?  See here for such a proposal, but since it depends on congressional action, forget about it.  We don’t need foreclosures to get there.)   The government’s RFI specifically mentions that it is seeking ideas for business structures for sale of foreclosed homes to be used as rental property (along with approaches to sale for resale or demolition).    The Center for American Progress is enthusiastic, saying that good approaches “could generate much-needed revenue for the government, expand the quantity of energy efficient, affordable housing to thousands of American families, and create well-paying jobs.”  But a note of caution, CAP first put forth the idea of selling foreclosed properties to investors to be renovated and used as scatter-site rentals a year and a half ago.  Similar ideas have already been implemented, for example in Los Angeles and Cleveland, using nonprofits as developers and with lease-purchase options so that longterm renters can become homeowners.  See here.   These sorts of projects have sometimes involved use of foreclosed homes in distressed neighborhoods, turned over at low prices or essentially as gifts from local taxing authorities.

Efforts to put foreclosed properties to good use could be swamped if we don’t also direct more energy to stemming the tide of inventory, a euphemism for what is left after people are tossed out of their homes.  Specifically, it would be nice to see foreclosure prevention linked in the government policy mill to the problem of dealing with foreclosed property.  Seemingly lost in the shuffle is the irony of focusing on large-scale transactions to rent foreclosed properties, to a market that includes their former owners.  Sure, FHFA could implement a program of large transactions in sales of foreclosed homes without congressional action.  But it could also act on its own to implement proposals to have the GSEs modify loans or convert loans to rentals, keeping people in the same homes under different terms while also reducing relocation and transaction costs and emotional toll.  Not all foreclosures can be prevented, but FHFA has done far too little to reduce the inventory problem by keeping properties from becoming foreclosed inventory in the first place.

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U.S. Plans Big Expansion in Effort to Aid Homeowners

By DAVID STREITFELD

The Obama administration on Friday will announce broad new initiatives to help troubled homeowners, potentially refinancing several million of them into fresh government-backed mortgages with lower payments.

Another element of the new program is meant to temporarily reduce the payments of borrowers who are unemployed and seeking a job. Additionally, the government will encourage lenders to write down the value of loans held by borrowers in modification programs.

The escalation in aid comes as the administration is under rising pressure from Congress to resolve the foreclosure crisis, which is straining the economy and putting millions of Americans at risk of losing their homes. But the new initiatives could well spur protests among those who have kept up their payments and are not in trouble.

The administration’s earlier efforts to stem foreclosures have largely been directed at borrowers who were experiencing financial hardship. But the biggest new initiative, which is also likely to be the most controversial, will involve the government, through the Federal Housing Administration, refinancing loans for borrowers who simply owe more than their houses are worth.

About 11 million households, or a fifth of those with mortgages, are in this position, known as being underwater. Some of these borrowers refinanced their houses during the boom and took cash out, leaving them vulnerable when prices declined. Others simply had the misfortune to buy at the peak.

Many of these loans have been bundled together and sold to investors. Under the new program, the investors would have to swallow losses, but would probably be assured of getting more in the long run than if the borrowers went into foreclosure. The F.H.A. would insure the new loans against the risk of default. The borrower would once again have a reason to make payments instead of walking away from a property.

Many details of the administration’s plan remained unclear Thursday night, including the precise scope of the new program and the number of homeowners who might be likely to qualify.

One administration official cautioned that the investors might not be willing to volunteer any loans from borrowers that seemed solvent. That could set up a battle between borrowers and investors.

This much was clear, however: the plan, if successful, could put taxpayers at increased risk. If many additional borrowers move into F.H.A. loans, a renewed downturn in the housing market could send that government agency into the red.

The F.H.A. has already expanded its mortgage-guarantee program substantially in the last three years as the housing crisis deepened. It now insures more than six million borrowers, many of whom made minimal down payments and are now underwater.

Sources said the agency would use $14 billion in funds from the Troubled Asset Relief Program, some of which it could dangle in front of financial institutions as incentives to participate.

Another major element of the program, according to several people who described it, will be to encourage lenders to write down the value of loans for borrowers in modification programs. Until now, the government’s modification efforts have focused on lowering interest rates.

Lenders began offering principal forgiveness last year on loans they held in their own portfolios. In the fourth quarter, however, this process abruptly reversed itself, for reasons that are unclear. The number of modifications that included principal reduction fell by half.

Bank of America, the country’s biggest bank, announced this week that it would forgive principal balances over a period of years on an initial 45,000 troubled loans.

Another element of the White House’s housing program will require lenders to offer unemployed borrowers a reduction in their payments for a minimum of three months.

An administration official declined to speak on the record about the new programs but said they would “better assist responsible homeowners who have been affected by the economic crisis through no fault of their own.”

The new initiatives would expand the government’s current mortgage modification plan, announced a year ago with great fanfare. It has resulted in fewer than 200,000 people getting permanent new loans. As many as seven million borrowers are seriously delinquent on their loans and at risk of foreclosure.

And with that, I bring you fresh news…

Delinquencies Are Still Climbing and Threatening More Foreclosures on the Horizon, MBA Says

08/20/2009 By: Carrie Bay

From the Wall Street Journal

By JAMES R. HAGERTY and LINGLING WEI

The Federal Housing Administration Tuesday suspended Taylor, Bean & Whitaker Mortgage Corp. from making loans insured by the federal agency, knocking out one of the biggest FHA lenders at least temporarily.

The FHA said the Ocala, Fla.-based lender failed to submit a required annual financial report and to disclose to the FHA “certain irregular transactions that raised concerns of fraud.” Taylor Bean has 30 days to appeal the suspension.

Taylor Bean was the 12th largest U.S. mortgage lender in the first six months of this year, according to Inside Mortgage Finance, a trade publication. Among originators of FHA loans, Taylor Bean was the third largest in May, with a market share of 4%, according to the publication. Only Bank of America Corp. and Wells Fargo & Co. were larger.

Taylor Bean’s woes are a major blow for hundreds of brokers and smaller mortgage banks that sell the loans they originate to the privately owned company. Those small mortgage companies will have to scramble to find new partners if they are to remain in the booming FHA lending business.

FHA loans have surged in popularity over the past two years as other sources of mortgage funding have dried up.

Lee B. Farkas, chairman of Taylor Bean, said in response to questions that he was unaware of the FHA action.

Ginnie Mae, a government agency that guarantees payments to holders of securities backed by FHA loans, said Taylor Bean is also barred from issuing securities backed by Ginnie. Ginnie said it will take control of nearly $25 billion of mortgage securities issued by Taylor Bean.

The moves came a day after federal agents raided the Florida offices of Colonial BancGroup Inc. and Taylor Bean. Taylor had been leading a group of investors that proposed to shore up Colonial by taking a stake in the Alabama-based bank but that transaction fell through last week amid heavy losses at Colonial.

Write to James R. Hagerty at bob.hagerty@wsj.com and Lingling Wei at lingling.wei@dowjones.com