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Abstract
Widespread housing foreclosures and the growth of real estate owned inventories impose significant negative externalities on local communities and their residents. An effective “disposition infrastructure” is needed to limit the damage, but historical efforts (in the HOLC and the RTC) and current experience (in the NSP and related programs) suggest this is a challenging task. Central among the challenges faced is that of managing private investor roles in the housing disposition process. Neither regulation nor funding alone is adequate to ensure that foreclosed homes are disposed of in a way that stabilizes rather than undermines neighborhoods. The article concludes by arguing that an effective disposition infrastructure may require a renewed discussion about lender responsibilities to local communities.
Notes
1In both the Savings and Loan and current crises, housing made up a very small proportion of the troubled assets to be disposed, but it is the most important sort of asset for communities, and thus I focus on housing in this article.
2A recent analysis of troubled loans from 2007 to 2009 concludes that lenders are far more likely to restructure loans they hold in portfolio, compared to those that have been securitized (Agarwal et al. 2011).
3However, once the full costs of financing were included, the net cost to the Treasury was estimated at $78 million (Comptroller General 1953, cited in Fishback et al. 2010, 9).
4The RTC dealt with a much wider range of assets than HOLC, including commercial real estate, vacant land, and both performing and non-performing financial instruments such as loans and mortgage backed securities. Only a tiny proportion (less than 1 percent) of the assets it disposed of was residential.
5The Bush (G.W.H.) Administration was intent on funding the RTC off-budget using bonds, to avoid triggering Gramm–Rudman budget thresholds that would force the Administration to increase taxes to fund the bailout. Democrats (and some Republicans) in Congress were determined the cost of the bailout should be placed on budget (Davisson 2006).
6These included the RTC Funding Act of March 1991, (PL 102-18, 105 Stat. 58), some new requirements attached to the VA and HUD Appropriations Act in October of 1991, and more fundamental legislative reform in December 1991 with the RTC Refinancing, Restructuring, and Improvement Act of 1991 (PL 102-233 105 Stat. 1761).
7That pressure led to another more positive outcome – the RTC pioneered the development of REITs and securities backed by multifamily mortgages, which helped expand investment in at least some sorts of multifamily housing by the late 1990s (Bradley, Nothaft, and Freund 1998, 8).
8The RTC provided 44 bridge loans to other public sector purchasers who played a similar role in holding properties until suitable non-profit purchasers could be identified (FDIC 2003, 379). In 32 states, housing finance agencies played the role of clearinghouses, and non-profit providers of technical assistance served as brokers.
9Initially, rules required individual properties acquired with NSP funds to be discounted by at least 5 percent, reflecting the expectation that there would be little demand for properties and lenders would be willing to accept lower prices. But by the time NSP funds were available, competition from private bulk purchasers put NSP buyers at a disadvantage; even a 1 percent discount on prices may be too high, given the appeal of selling large volumes of property in a single transaction (Newburger 2010, 102; Shelterforce 2010).
