Investors can certainly play a role in the U.S. housing recovery. Indeed, in some local housing markets they have already helped halt and even reverse rapid price declines. Policymakers must monitor and manage investors to ensure that they are acting responsibly and playing a stabilizing role in communities.

But investor purchases alone cannot sustain a long-term housing recovery. In order for a housing recovery to last, it must be built on homeowners who are more likely to remain even if investors exit the market in search of more aggressive returns. With that in mind, the Center for American Progress suggests the following strategies for insuring a lasting housing recovery that strengthens the national economy while creating affordable homeownership opportunities for qualified buyers.

Step 1: Help homeowners stay in their homes
The housing recovery remains an abstraction for the more than 2 million households still at risk of foreclosure in the United States. When possible, preventing these foreclosures is the first step toward a strong housing recovery. Allowing more of these families to lower their monthly mortgage payments through refinancing or principal reduction could help millions of families avoid foreclosure and likely save money for the U.S. government and lenders. CAP commends the Obama administration for renewing the Home Affordable Refinance Program and Home Affordable Modification Program, which are critical foreclosure-prevention tools. CAP also urges the Federal Housing Finance Agency to allow homeowners with government-backed mortgages to secure more-affordable monthly payments through principal forgiveness.
 

Step 2: Level the playing field for owner-occupants and mission-driven organizations
Households and community groups that are unable to access credit are struggling to compete with cash investors to buy homes. With a more level playing field, buyers who are more rooted in the community than the average investor would be better positioned to own properties in their neighborhoods. Encouraging more local buyers may be a less risky neighborhood stabilization strategy than relying on outside investors that are less likely to stay.

Some of the tools designed to help families and community groups compete with investors for bank-owned homes—such as “first look” programs—are less useful now that fewer distressed homes are making it all the way through the foreclosure process. Instead, banks are unloading underperforming properties either by selling the underlying mortgage or selling the home via a short sale, or trustee sale. It is harder for owner-occupants to compete in these venues, which require a lot of capital.

Similarly, many institutional investors are buying large portfolios of distressed mortgages directly from financial institutions or through federal sales of nonperforming assets. Owner-occupants do not have access to these sales and it is very challenging for community groups to compete in these arenas. In the Federal Housing Finance Agency’s first REO bulk sale last year, community groups failed to win in a single pool.

In future bulk sales of nonperforming assets, governmental agencies should give substantial preference to mission-driven organizations that will work to keep existing homeowners in their homes or resell the property to an owner-occupant at an affordable price. Federal banking regulators should also provide closer scrutiny to the bulk sales of distressed mortgages carried out by private financial institutions to make sure the entities purchasing these assets are well qualified to service the portfolio.

Additionally, the Federal Housing Administration, or FHA, could help nonprofit affordable-housing and community-development groups meet financing challenges by expanding their access to rehabilitation mortgage insurance. The FHA’s rehabilitation mortgage insurance, known as its 203(k) program, allows homebuyers to include renovation and repair costs in their mortgage. In recent years, however, this critical financing has been largely unavailable to nonprofits because of administrative hurdles, including unclear underwriting criteria. The FHA should work together with lenders and the affordable-housing community to use the existing 203(k) program and make program improvements so that responsible, well-capitalized nonprofits can use this financing to help rebuild neighborhoods.
 

Step 3: Monitor and manage investors
Ensuring that investors take care of their properties is key to leveraging investment for the benefit of the community rather than to its detriment. In 2010, researchers at PolicyLink and the Local Initiatives Support Corporation, or LISC, took an inventory of approaches at the state and local levels to hold investor-owners accountable and shared proactive strategies for strengthening local code enforcement and improving investor behavior.

These approaches include rental registration and licensing programs that help cities better track investor owners and their properties because, through regular inspections of licensed properties, local governments can quickly detect problem landlords. These strategies for tracking and managing investor-owned properties deserve attention. As communities continue to experience high rates of investor ownership—and especially as relatively untested institutional investors enter communities—local governments must closely monitor investor behavior.

The federal government should also publish assessments of investors that have purchased properties through distressed-asset sales. In 2012, the Federal Housing Finance Agency, or FHFA, sold bulk pools of REO properties that comprised about 1,750 homes to investors in Chicago, Las Vegas, Los Angeles, Phoenix, and parts of Florida. So far, the agency has not released any reporting on the performance of the investors and these pools. Similarly, the FHA has held multiple auctions to sell distressed FHA mortgages—selling more than 45,000 loans since September 2012—but has not posted follow-up performance data.

It is crucial for the FHA and the FHFA to carefully monitor these pools for compliance with the terms of the sale and assess the impact of institutional investors on neighborhoods. The agencies should then release that information to the public to increase transparency and hold investors accountable.

Some of the investors that purchased properties through the FHFA auctions, such as institutional investor Colony Capital LLC, have a large national presence that extends beyond the FHFA pilot program. Moving forward, the FHFA should share more of the lessons learned from the pilot program to help state and federal policymakers better anticipate challenges that may arise in the broader REO market.
 

Step 4: Get the mortgage market working again for America’s families
Ultimately, a robust and lasting housing-market recovery will require a resurgence of owner-occupant homebuyers. Yet the ability to secure a mortgage for a home has become elusive to many Americans.

Right now, the typical borrower approved for a conventional mortgage has a FICO score of 755 and makes a 20 percent down payment on a home. Given that nearly two-thirds of Americans have credit scores below 750 and that it takes the average family 20 years to save for a 10 percent down payment, the ability to buy a home is increasingly limited to the wealthiest of America’s families.

The secondary mortgage market in which investors buy mortgages, package them into securities, and sell them to other investors plays a significant role in whether credit is accessible and affordable to families. Lenders are less likely to make a mortgage loan if they are not confident that they can sell it on the secondary market. Right now, the secondary market is supported in large part by Freddie Mac and Fannie Mae, which were taken over by the government and remain in conservatorship. The confusing objectives of the conservatorship and investor uncertainty have kept credit very tight, especially for first-time homebuyers. In the first quarter of 2013, 76 percent of all mortgages purchased by Fannie Mae and Freddie Mac were made to homeowners who refinanced their existing mortgages, as opposed to financing renters to purchase their homes.

The nation urgently needs housing finance reform to make sure that we have a well-functioning secondary market that can serve all communities.

Conclusion
Investors can and should be part of our nation’s housing recovery, but there are serious risks associated with leaving neighborhood recovery in the hands of private investors. In order to make sure neighborhoods reap the benefits of this new investment, we must make sure investors are well monitored and managed at the local level. As bigger, relatively untested institutional investors enter the market, local officials should pay particular attention to how well they care for their properties. Federal regulators must also pay attention to the activities of institutional investors, particularly if a new market develops for securities backed by these investor-owned properties.

We must also redouble efforts to build a robust housing recovery that will allow communities and families the opportunity to rebuild. The housing market will not fully recover until we fully address the foreclosure crisis and fix the mortgage market so that creditworthy families can once again buy homes.