Lewis S. Ranieri, the pioneer of the mortgage-backed security, is proposing a fix for the housing mess that he arguably had an inadvertent hand in creating.
The government-sponsored enterprises Fannie Mae and Freddie Mac should ease their current restrictions and allow individual investors to purchase up to 50 foreclosed homes each, Ranieri said at a banking conference on Sept 19. Fannie currently limits individual investors to 10 real-estate owned properties each, while Freddie restricts them to just four.
The two GSEs own a combined 300,000 homes, and the government has been struggling to unload that backlog since the housing market plummeted. That crash was partially precipitated by the booming investor demand in the last decade for mortgage-backed securities, which gave banks incentives to ease their lending standards and offer mortgages to the riskiest borrowers.
Ranieri pioneered those securities in the 1980s, when he was a vice chairman at Salomon Brothers, and has since widely been credited (and blamed) for laying the groundwork for the modern housing market. Since that market imploded, sparking the financial crisis, he has been one of the few mortgage industry executives to criticize banks as well as the government for failing to recognize the damage to society from forecloses.
"The dead weight of the real estate market's huge REO inventory and the late stage delinquencies are dragging the nation's economy under water," Ranieri told a group of 250 bankers at the conference in Raleigh, N.C.
"Long-term structural harm faces us if we do nothing," he said.
He criticized James Lockhart, the former head of the Federal Housing Finance Agency, for imposing limits on individual investors who buy foreclosed properties at auction, typically on courthouse steps. Removing such barriers would let the market clear more quickly, said Ranieri, who now is the chairman of a specialty mortgage servicer.
He has previously urged the government to consider a national rent-to-own program to alleviate the national foreclosure crisis.
He said at the conference that though converting single family homes to rentals "sounds difficult," such programs are "shovel ready," and would have an immediate impact on both consumer spending and jobs.
Raising the GSEs' limits for individual investors would allow "the locals to go back to work," he said. "We're talking about creating jobs for builders, handymen, real estate professionals and reaching out to local doctors, lawyers and dentists who have the means to buy these loans."
Fannie and Freddie should also offer lower down-payment financing to individual investors willing to buy these homes, he said. "The missing element is a workable investor-finance program to set the process into high gear."
In August, the FHFA issued a request for information on how to unload properties. It is sifting through the 4,000 responses.
Some of Ranieri's harshest comments were directed at the Federal Reserve and policymakers who he said have shelved "good ideas" that would address some of the housing market's structural problems because they would "displease some participants in the capital markets."
The White House has proposed a refinancing program for underwater borrowers who owe more on their mortgage than their home is currently worth. But banks are reluctant to allow such borrowers to refinance because if underwriting defects are found, the banks would have to repurchase the loans from Fannie or Freddie.
While the Federal Reserve, portfolio lenders and institutional investors have all claimed they would be harmed by any "mass refinancing," Ranieri said such arguments are ridiculous because loans that are refinanced "are paid off at par."
"There is no contract that states these loans can't be refinanced," Ranieri said. "If [lenders and investors] want to wager that underwater citizens should languish in mortgage purgatory, they should place their bets. What do you think is going to happen if all these consumers realize that they are stretching to pay for a house they can't afford to own? They are going to stop paying. This is another issue that will not go away."