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BENEFITS BEAT
A Pension Fund Opportunity
in Housing Markets?
Looking beyond the mortgage market bailout.
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The nation's housing market is a mess. The recent federal bailout of Fannie Mae and Freddie Mac was the largest federal intervention of its kind in modern history. Hopefully the U.S. Treasury will be able to backstop the nation's mortgage securities markets to prevent further financial gridlock. Meanwhile, the prices of homes continue to spiral downward. With foreclosures mounting, buyers are afraid to step in. With more homeowners now "upside down" in their homes, the temptation to turn in the keys is mounting, and the problem keeps getting worse.
I keep waiting for the point where it will make sense for public pension funds to step into these stormy waters with solutions, and unfortunately I think it is still too soon to do so safely. But I have a few ideas to share for those plans that would like to start thinking strategically about how they can help solve their own states' housing market maladies while also making an exceptional return on investment for their employees, retirees and taxpayers.
Pension funds can now start looking closely at the jumbo mortgage market. Yields on conventional home loans dropped dramatically after the government's Fannie/Freddie seizure, but jumbo loans are still trading with mortgage yields of 1 percent above conventional mortgages. That suggests that sometime soon there will be solid investment opportunities for institutional investors working with savvy mortgage bond investment firms that know how to select the right loan portfolios and manage them prudently. Delinquencies are still rising in the prime jumbo market, so there is still time to develop a prudent strategy before it is safe to enter.
Second, Congress should expand the authority of state housing finance agencies to issue tax-exempt bonds without limitation for a short period of time — say nine months — to provide lower-cost municipal financing to homeowners. As the federal government begins to rein in the size of Freddie and Fannie, it may be very important for the states to step up the plate with an increasingly active role in this regard. My calculations show that a temporary waiver of the state volume caps for housing finance agencies could solve over half of the refinancing problems nationwide at an annual revenue loss from the tax exemptions in the range of $10 billion, maybe less. That would be offset entirely by the tax receipts the IRS would collect from holders of mortgage securities and financial services firms that don't go down the drain if the housing market melts down. This is one program that literally would pay for itself.
By partnering with state housing finance agencies, I suspect that public pension funds might find some interesting real estate and mortgage investment opportunities. I have no specific plans to suggest, but my investor instincts and my public policy roots tell me that something is waiting to happen here.
A third strategy for pension funds would be to work with the new federal trustee for all those mortgages to be bought from the private sector in the newly announced federal bailout. Once the dust settles in the housing markets, the feds will want to sell those portfolios off to pension funds and other parties willing to own the mortgages. Better prices and superior returns will come to those who buy direct from the division within the Treasury that is set up to handle it or whatever new agency is created.
Finally, pension chief investment officers should look closely at the entrepreneurial approach taken by several private firms that are now putting their money where their mouths are in the housing market. Three companies cited in a recent Los Angeles Times article are providing cash to homeowners in exchange for appreciation rights in the future value of the house. What's even more interesting about their approach is that they also agree to share in any losses in value. In my mind, that is pretty gutsy, and it means that these are serious players who are making calculated risks and doing their homework.
I don't endorse specific firms to pension funds, but in this case, I would think that a new institutional investment vehicle could be crafted from the works of these private-sector pioneers.
The American housing market has not hit bottom yet, but institutional investors who begin to line up their strategies for the eventual recovery will be well rewarded. 2009 could be a fruitful year for those who are prepared.
Girard Miller, an analyst of benefits and investments with 30 years of experience in the public, private and nonprofit sectors, can be reached at Girardinmalibu@charter.net. His general market observations and institutional investment strategies are his own and should not be construed as investment advice or recommendations concerning specific securities.
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