Release The Fly to Eat The Moth

The economy is in the doldrums. The bailout efforts shift directions and so far neither liquidity nor activity is seen at any meaningful level.

Everyone agrees that the root of all difficulties is HOUSING and HOUSING PRICES. Digging in a little deeper in the most afflicted markets, everyone will tell you that the root of the trouble is EXCESS INVENTORY of houses. With excess inventory it is hard to gauge whether a true bottom has been reached. It is hard for prices to start marching upwards, and the banks remain in a deep freeze. In addition, banks keep adding to the inventory via their REOS.

Remember how a few times in the past, when there was a pest (say some type of moth) that was dangerous to our crops, the government released another benign pest, like a fly, that eats the dangerous moth, thus ridding us of the problem? Well there is a way to solve the economic problem, and the fly/moth analogy can point to the solution.

If you notice the language being used to describe various investors it goes like this: people who buy stocks are called INVESTORS. Everyone cares about these investors, realizing their importance to the equities market. People who buy real estate are dubbed SPECULATORS in a deriding tone. No bailout or loan modification effort should be bestowed upon these SPECULATORS, according to the government. No one calls people who buy real estate by the name “investors”. This attitude, my friends, may be hampering the solution to the economic problems. Changing this attitude may hold the seeds for the solution.

The exact markets that were hit the hardest present the best investment opportunities for serious real estate investors worldwide. Like the benign fly, serious real estate investors can swoop in and buy the outrageously-priced REOs, foreclosures etc. By buying these distressed bargains, real estate investors will not only improve their own financial situation for the future, but they will assist in lowering inventories in those markets, thus hastening the recovery. Everyone wins. This, when done on a large scale, can have a major beneficial effect on the ENTIRE ECONOMY!

One would think that the government, or lending agencies controlled by the government, would bend over backwards to make it as easy as possible for QUALIFIED investors to get into the market and gobble up this bargain excess inventory. In reality, the government has done EXACTLY THE OPPOSITE of what needs to be done. The ability of qualified, strong real estate investors to get financing, has been cut and limited to the point that this incredible phenomenon of real estate investors absorbing excess inventory and helping the economy has ground to a halt before it can begin in earnest.

The “Conforming Loan” limit as defined by FNMA and Freddie Mac, used to be 10 properties up until a few months ago. This means a qualified real estate investor could get a good loan at a good interest rate and a reasonable down payment, if they had less than 10 properties with mortgages on them.

As a knee-jerk reaction to the downturn, these agencies have reduced that limit to 4 properties a few months ago. As a result, real estate investors who own over 4 properties are having a much more difficult time getting loans to buy property. This group of experienced investors are EXACTLY the ones realizing the great opportunities this low cycle presents . Yet exactly this group is severely hampered from going in and buying.

Another important group are the FOREIGN INVESTORS. Foreigners not only realize that there are incredible real estate opportunities present in the United States today, but they get an even bigger discount by virtue of their currency being stronger against the dollar than it normally is (despite the dollar’s recent recovery). The foreign investors, up until about a year ago, used to be able to invest in US property and get good loans by putting 30% down. Most of the foreign investor loan sources have now been closed as well. This, of course, means that a very large number of excellent investors are on the sidelines, unable to buy.

The result of this mindless reaction is to shut down the exact sources of help this downturn needs. The flies that can eat the deadly moth are not enabled to take flight. The true, serious real estate investors who can gobble up the excess inventory, which is priced so well, are hampered and delayed in their efforts. The government is doing THE EXACT OPPOSITE of what needs to be done!

THE SOLUTION: What needs to be done is that the limit for conforming loans needs to be raised from 4 to 20, or even 30 properties. I am not saying that banks should lend money to investors who are not qualified. On the contrary: every loan will be a full-documentation loan. Only qualified investors will get approved. Raising the limit for conforming loans will raise by hundreds of thousands the number of qualified investors who can get into the hardest-hit markets and buy up excess inventory - to their benefit as well as the benefit of those markets and the overall economy. Everybody wins! As a bonus, banks will be making more loans, thus freeing up the lending machine to start rolling more freely. All that is needed for this to happen is for FNMA and Freddie Mac to change the number from 4 to 20 or 30. No expensive bailouts, no extra federal funds!

The foreigners should be allowed to come in and invest as well. Putting 30-35% down should be enough to let the foreigners get good loans. Again these loans should only be approved for qualified people (income and assets can be verified for foreigners as well). This will unleash another wave of investors to pick up the discounted excess inventory in the hardest-hit markets. it will also enable the banks to lend to many other qualified individuals and grease the wheels of credit liquidity. No extra money needs to be spent by the government for this.

The beneficial flies that can eat the harmful moth can be made to spread their wings without any bailout money!

Why does the government not see this simple solution? It is because everyone handling the problems comes from a Wall-Street background. Everyone is focused on stocks and bonds. Housing is only looked upon as places owned by owner-occupants. “Speculators” are seen as a scourge.

Even the new administration, so intent on CHANGE, is commissioning very well-respected experts (including the infinitely wise Warren Buffet) in the realm of STOCKS, Wall-Street and Bonds.

THERE IS NOT A SINGLE EXPERT FROM THE RESIDENTIAL REAL ESTATE INVESTMENT COMMUNITY BEING CONSULTED. NO ONE TO SHOW THE SIMPLE, EFFECTIVE, AND VERY “FREE MARKET” SOLUTION TO SO MANY PROBLEMS.

Handling this issue, which can be done so easily, can literally stave off a prolonged recession and get the economy going. What a boon that would be for the new administration! Even their first 100 days in office can look very different if these solutions are implemented.

Let’s all try to raise our voices and be heard on this issue. I will gladly sit in front of any committee to discuss this. I will talk to any leaders and in any forum to shed light on this very simple solution to such a painful problem.

I hope very much that this issue is both heard and handled by the government and its agencies. We, real estate investors, and our brethren worldwide, can hold the key to a much speedier recovery.

Adiel Gorel,
CEO, ICG