The Residential Solution

Since 2007, home prices have fallen dramatically. However, if you take away the effect of foreclosures and distressed properties on the market–solely focusing on traditional home sales–prices were only down 0.6%.

The Wall Street Journal recently ran an article on ways to reinvigorate the housing market. Following Barack Obama's pledge to be “aggressive” on revitalization, WSJ spoke to several economists for potential solutions.

Lewis Ranieri is one such expert. He is is credited with creating the private mortgage backed securities “market,” as well as raising over $150 million for a fund targeting distressed commercial real estate debt. Regarding the number of loans Fannie or Freddie provides for any one owner, Ranieri states:

“If that number [of mortgages] were raised to 25, you would very quickly start whittling down this very big backlog.”

I think he's right. If Obama wants to create an environment conducive to private investment in the over-supplied housing market, he and his administration could do the following:

•  Significantly increase the number of loans available to a single investor
• Provide these loans on very conservative terms (e.g. requiring 20% or 30% down payments)
• Eliminate or significantly reduce capital gains taxes for investors of residential real estate portfolios

Perhaps publicly traded mortgage REITS like Pennsylvania-based RAIT (or non-traded mortgage REITs like Inland, Wells, or CNL) are poised, more than anyone, to restabilize the residential market. With a little slack in the regulatory line, the current housing situation could be the impetus for a new crop of non-bank mortgage lenders–which more well-known, brick-and-mortar banks would have previously squashed.

Institutions like Fannie, Freddie, TD Bank  and Chase (JPM) seem to have gorged themselves to their respective limits, but they've left some pretty tasty crumbs on the table. For a group of smaller lenders with pent-up capital, particularly those interested in asset recapture the way other investors are interested in ROIs, this could be an excellent opportunity. After all, commercial real estate has proven desirable to private investors; why should residential be any different?