DS News

54 WALKING THE TIGHTROPE OF GSE REFORM Recently, President Donald J. Trump signed a memorandum tasking the Treasury Department and Department of Housing and Urban Development (HUD) with preparing a reform plan for Fannie Mae and Freddie Mac. e White House memo directed that this plan be delivered "as soon as possible." In an opinion piece published by the Wall Street Journal, American Enterprise Institute fellows Peter J. Wallison and Edward J. Pinto discussed the feasibility of the Presidential memo and its proposed reforms. According to Wallison and Pinto, the memo's direction to the Treasury will lead to government housing-finance system that roughly replicates what existed before 2008, notably "government backing for the obligations of the government- sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, and affordable-housing mandates requiring the GSEs to encourage and engage in risky mortgage lending." "ese elements will be retained, but the problems they caused in 2008 are supposed to be mitigated by better regulation, more capital for the GSEs, and compensation to taxpayers for the risks they'll assume when the government guarantees the GSEs' obligations," Pinto and Wallison's op-ed states. "e housing lobby misled the public before on the efficacy of these protections." According to Wallison and Pinto, the FHFA should shrink their footprint as the conservator of Fannie and Freddie over a period of five to 10 years. ey suggest reducing the size and types of mortgages that GSEs could buy and opening larger portions of the housing-finance market to the private sector, improving competition. "Most of the U.S. economy is open to the innovation and competition of the private sector," Wallison and Pinto said. "Yet for no discernible reason, the housing market—one-sixth of the U.S. economy—is and has been controlled by the government to a far greater extent than in any other developed country." e Presidential memo states that "in the decade since the financial crisis, there has been no comprehensive reform of the housing finance system despite the need for it, leaving taxpayers exposed to future bailouts." e memo went on to claim that "the Department of Housing and Urban Development's (HUD) housing programs are exposed to high levels of risk and rely on outdated business processes and systems." THE RISKS OF FIRST- TIME HOME-FLIPPING First-time real estate flippers are feeling the losses of investing in real estate according to a Bloomberg report. "Flipping only works in an appreciating market where homes move quickly," says Glen Weinberg, the Denver-based COO of Fairview Commercial Lending. "ose factors are now in flux, and that's what's going to lead to the demise of a lot of flippers." Bloomberg noted that around 6.5% of U.S. sales in the fourth quarter were flips or homes sold within a year from when they last changed hands. at made for the highest share in seasonally adjusted data going back to 2002, according to CoreLogic. Per CoreLogic's analysis, 45% of flips in the San Jose area lost money. One young investor, Sean Pan, who started flipping at 27, lost $400,000 on a property in Sunnyvale, California. Pan bought one home for $1.8 million after bringing the asking price down from $2 million, assuming he got a "sweet deal." However, the home sold for $1.7 million, more than $80,000 less than what he paid for it. "When you buy these houses, you never think you'll lose money," he said. "I fixed it up. It should be worth more, but things change." e report notes that most flippers are sinking money into renovations, unlike before the crisis, when investors would simply buy houses and then sell them immediately. Many hard-money loans, which come from private investment groups, often have high-interest rates and low down payments and they include renovation costs in the loan amount. Weinberg states that, as competition between lenders heats up and many lenders offer 10% or lower down payments for flippers, he is being more selective, requiring a 40% down payment.

• Cover