Yesterday, the House passed legislation aimed at helping 400,000 homeowners facing foreclosure and helping shore up Fannie and Freddie.
Among several items which I discussed yesterday, the bill provides $3.9 billion in grants to local governments to buy foreclosed properties. President Bush fought this provision for some time before giving in under the pressure to “do something”. Before he caved to the pressure, he had it right.
As my earlier post suggests, I’m not a big fan of this legislation. First, I do not think the government can fix the problem of a market correcting itself, and second, I think is a huge government bailout that shifts the burden from the lender’s who made stupid lending decisions to taxpayers by increasing deficit spending. (The bill just moves bad debt from borrowers to lenders to taxpayers.)
The most absurd provision of the bill is the allocation of $3.9 BILLION (with a B) to local governments to buy foreclosed properties. Yes, the newest member of your local real estate investor’s club just may be you city’s mayor. I can see it now . . . billboards with your mayor’s face . . . proclaiming: “The City of Smallville – We Buy Houses!” I see the City Council voting on whether to paint the kitchen off-white or “more of a taupe”. Local citizens could make public comments on whether the city should install stainless steel or white appliances. And the public works department could be tapped to undertake the repairs. (How many city employees does it take to change a light bulb?)
At least local government is well prepared to undertake the messy work of cleaning up and fixing foreclosure properties. Most local governments have surplus resources – having fixed all the potholes, sidewalks, roads, schools – and are eagerly looking for places to put their public works crews to good use. With a slush fund of $3.9 Billion dollars, your local government will be quite a big shot at your local real estate investors club.
It won’t be all bad news. Those people with close connections to local politicians, campaign contributors, and other insiders will have access to great deals from local government after it buys houses from banks with federal taxpayer money. City governments can then sell the properties to the well connected supporters of city counsel members, mayors, and city employees – so don’t worry, there will be plenty bargains out there for the well connected.
I can’t think of a more ridiculous response to the mortgage mess than to turn local governments into real estate investors. Buying, cleaning, fixing up, and selling houses is not an easy thing to do successfully. The market does a great job of humbling those who do not do it well and rewarding those who figure it out. The housing market is in the middle of healing itself –let it get healthy without sending in woefully ill prepared local governments to do the job of skilled investors.
When the local governments get burned in the marketplace by doing bad deals – it will be the local taxpayers who will have to pay to bale them out . . . again. But since it sure looks like something that is going to happen – tell your mayor and city counsel now that there are great training opportunities at your local real estate club to learn the art of investing in real estate.
