Retrofitting Foreclosed Homes: A Matter Of Public Trust

Editor’s Note: EarthTechling is proud to repost this article courtesy of Center for American Progress. Author credit goes to Bracken Hendricks and Adam James.

This past February Fannie Mae initiated a pilot program in six of the hardest-hit metropolitan areas to offer pools of repossessed homes to eligible investors looking to rent them out. The need for this program sprung out of the two mortgage finance giants Fannie Mae and Freddie Mac—both currently in government conservatorship—collectively owning about 179,000 foreclosed homes, mostly from mortgages they insured or securitized before the housing bubble burst several years ago. Unfortunately, only a small subset of these foreclosed properties are in good enough shape and in strong enough markets to be sold directly to families looking for a place to call home. For the rest, low home prices and weak demand for owner-occupied homes mean that selling hundreds of thousands of them into that market will depress prices for a long time to come.

This pilot program followed most of the recommendations we made in an earlier paper, where we argued for a process we call “rehab-to-rent.” In this process a portion of these properties are removed from the glutted for-sale market and converted into affordable rental units. Yet the pilot program did not include a consideration of retrofit strategy as a part of the bidding process because those properties were occupied. This issue brief argues that bidders should present a strategy for retrofitting properties where it is cost effective, including labor provisions and proof of capacity to ensure quality of work. Here, we look at the wise economics of retrofitting some of these homes so they are made more energy efficient before being rented out, which would:

  • Boost the value of the homes when federal government agencies eventually sell the properties
  • Spur hiring in local construction markets in the meantime
  • Help renters pay less for energy and more for other goods and services in their communities

How would this work? The Federal Housing Finance Agency, an independent agency that regulates the activities of Fannie Mae and Freddie Mac, could allow the two mortgage finance giants to sell a portion of their large portfolios of foreclosed homes to investors who would partner with them when appropriate to create a pool of energy-efficient rental housing that the federal government could eventually sell alongside their private-sector partners. We argue that the Federal Housing Finance Agency should capitalize on the rehab-to-rent process to promote more energy-efficient housing for renters and boost the long-term value of these properties for U.S. taxpayers.

image via Shutterstock

Moving these properties back into private ownership over the long term through a so called “disposition strategy” is the core function of the Federal Housing Finance Agency. To that end, the agency has put forward the idea that they should conduct a disposition strategy that reduces taxpayer losses and stabilizes neighborhood and home values. In evaluating bidders for portfolios of these properties, the agency already boasts a set of criteria which applicants must meet in order to qualify for consideration—a procedure that could easily be modified to include criteria allowing property managers to present a plan for how they will make energy-efficient retrofits to those properties when doing so is cost effective.

This requirement is crucial to meeting the Federal Housing Finance Agency’s dual mandate, succinctly expressed by its acting director, Edward J. DeMarco, as an objective to both “reduce taxpayer losses” and “stabilize neighborhoods and home values.” His agency can do just that enabling Fannie and Freddie through an energy-efficient rehab-to-rent program. In this issue brief we show the real and calculable net benefits to performing cost-effective energy retrofits to federally owned foreclosed homes and we demonstrate why the Federal Housing Finance Agency should seize this opportunity to protect the public interest and realize its dual mandates by:

  • Reviewing energy retrofit strategies from future bidders for appropriate foreclosed properties—strategies that consider the capacity to perform the retrofits and include key labor provisions to boost good-paying jobs in these communities
  • Considering public-private joint-venture structures in the future sales of these homes so that taxpayers profit from the upside of the retrofitting

We demonstrate that energy savings create real and substantial value in both reducing taxpayer losses—or more positively by maximizing taxpayer returns—and in stabilizing housing values and neighborhoods.

But the ability to capture these benefits for taxpayers will be possible only if the Federal Housing Finance Agency pursues joint-venture structures that allow taxpayers to profit from the operational savings that result from retrofits, and certainly profit when the energy-efficient homes are eventually sold when market conditions are better and the communities they are in are more prosperous. If taxpayers are to profit from the sale of a more valuable property down the line they must have some ownership stake.

Likewise, if taxpayers are to reap the benefits of operational savings, they must have access to revenue streams as property managers. Additionally, the strategies outlined here will promote the solvency of Fannie and Freddie over the long term by diverting homes from the sales inventory into other productive uses such as generating rental income.

But retrofits also compellingly advance the Federal Housing Finance Agency’s larger public purpose of stabilizing neighborhoods and home values. In addition to keeping these properties off the for-sale market, energy retrofits make properties more affordable for tenants, reduce tenant turnover, and create jobs within local communities. By increasing affordability, tenant retention, and assessed property values, energy retrofits uniquely provide neighborhood and home-value stabilization.

These public-good benefits should not be glossed over. The benefits of creating energy-efficient housing stock are both global and local, from improving housing access and affordability, to creating good jobs, to reducing dependence on foreign oil and offsetting climate change. The case study contained in this issue brief makes clear that the Federal Housing Finance Agency should not ignore the tremendous benefits of joint ventures and cost-effective energy retrofits in the course of both future pilots and the broader disposition strategy for this backlog of homes currently held in public ownership.

Below we provide detailed analysis to show that it is in the public interest to use energy retrofits to gain maximum total returns for taxpayers from the foreclosed homes owned by Fannie and Freddie, and to encourage ownership structures that allow taxpayers to participate in the upside when the value of these properties increases.

An energy retrofit strategy is crucial to meeting the dual mandate of the Federal Housing Finance Agency

The acid test for any strategy to move these homes to market is the agency’s dual mandate to maximize returns to taxpayers and stabilize home values. The disposition process is a unique opportunity on both of these fronts because the agency can put forth guidelines on what bidders can present for evaluation as part of participating in the purchase of these homes.

Currently these guidelines vet bidders for certain characteristics, such as financial solvency, because without meeting those criteria, ensuring returns and stabilization would be impossible. We argue that performing energy-efficient retrofits is a clear-cut way to meet this dual mandate, and therefore should be considered at the front end of the bidding process.

There are two conditions that frame this case for retrofits. First, the Federal Housing Finance Agency has the capacity to enter into some of these transactions as a partner in a joint-venture structure. This enables the taxpayer, via the agency, to maintain a financial stake in the properties. Second, the added cost of undertaking an energy retrofit at the time when investors are already making capital improvements to ensure the safety or rehabilitation of the properties is small compared to the increased economic value it will generate. (There is also a strong case to be made for performing retrofits in situations where the property is sold outright instead of a joint venture, or if no rehabilitation occurs, but this issue brief restricts its scope to circumstances where these conditions are met.)

During the disposition process the Federal Housing Finance Agency and the taxpayers it serves will be best protected by the decision to consider entering into joint ventures, and give consideration to property managers who present a plan in the bidding process to perform energy-efficient retrofits where appropriate. This provides both an avenue for taxpayers to access value and the mechanism for creating that value.

Below, we will detail how exactly this mechanism works, and how it relates to the agency’s mandate. Specifically, we argue that energy retrofits:

  • Maximize returns in the case of joint ventures both incrementally through decreased operating costs or increased property competitiveness, and terminally upon sale of the property as a higher-quality asset
  • Stabilize neighborhood and home values by holding these homes off the for-sale market, increasing the affordability of the property through decreased utility costs, and employing local laborers to stimulate regional economies.

Unfortunately, to date the Federal Housing Finance Agency has focused too strongly on minimizing near-term costs for taxpayers without looking at the total costs and foregone benefits for citizens. While the rapid sale of foreclosed homes does indeed move these assets off the government books, it can also destabilize housing markets, weakening the value of Fannie and Freddie’s larger mortgage portfolio, sacrificing future opportunities for taxpayers to benefit when markets recover, and creating a massive wealth transfer from the public trust to private investors.

Real success means seeing the bigger picture. This is why the Federal Housing Finance Agency must consider the net value of the housing stock in the context of the broader market if they are to succeed in meeting either, or both, parts of its mandate. The lens for looking at bidders should include these longer-term considerations if the taxpayers are truly going to make good on their investment. American taxpayers, who have held a stake in these homes at considerable risk, should be provided with the opportunity to participate in the up side of their value creation instead of just facilitating a value transfer.

The Center for American Progress is an independent nonpartisan educational institute dedicated to improving the lives of Americans through progressive ideas and action. Building on the achievements of progressive pioneers such as Teddy Roosevelt and Martin Luther King, our work addresses 21st-century challenges such as energy, national security, economic growth and opportunity, immigration, education, and health care. We develop new policy ideas, critique the policy that stems from conservative values, challenge the media to cover the issues that truly matter, and shape the national debate.

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