Meet Your New Landlord - The Government

Found an interesting little factoid today on the Christian Science Monitor website - that the Federal government (or"gum'mint" as some like to say around here) owns about half of the foreclosed properties in the country. Those properties came to the government via Fannie Mae, Freddie Mac, HUD, and the VA and total a bit over 200K units. That roughly matches the inventory number of houses for sale in May of this year, so it is not a trivial number.

This position leads to all sorts of interesting problems. Certainly foreclosed properties represent a downward pressure on home values (both in their neighborhood and the overall market). By the same token, quickly disposing of them would make bad housing markets (it is fair to assume, I think, that these properties are disproportionately located in hard-hit markets) even worse. And then on top of that you have the whole nativist / Tea Party / "everything Obama does is wrong because he's Obama" crowd likely to go up in arms at the notion of the government being such a large player in the "private housing market" (let's just not even deal with the fact that the government has been deep in the "private" market for decades and that won't change).

What really struck me about this was that it brought back memories of something I recommended a few years back. When I worked for Smith Breeden, I was part of the econ team as things were falling apart in 2008. At that time, as notions like the TARP and TALF were being discussed, I suggested that the government should just selectively buy houses - I called it the "Little Dutch Boy approach" and the idea would be to selectively buy properties here and there to stabilize markets. My colleagues on the economic team, being generally conservative economic types, weren't too impressed.

Lo and behold, the government sorta ended up doing what I was talking about, but in the least effective, most expensive, and generally sloppiest way possible. Gee, what a surprise, right?

There really aren't any easy ways out of this. I expect that the government will eventually decide that it's "not in the business of owning homes" and sell them to banks, probably large banks, at a discount and allow those banks to flip 'em when the property markets get better. In the meantime, they get to continue playing the role of bag-holder for other people's poor underwriting decisions.