Houses for Heroes and other ways to reinvent how the government deals with the 248,000 foreclosed homes it now owns

The United States government owns 248,000 homes as a result of defaults on government-backed mortgages (http://www.msnbc.msn.com/id/44375023/ns/business-us_business/).  MSNBC characterized the problem as follows:

“For sale or rent by distressed owner: 248,000 homes. That’s how many residential properties the U.S. government now has in its possession, the result of record numbers of people defaulting on government-backed mortgages. Washington is sitting on nearly a third of the nation’s 800,000 repossessed houses, making the U.S. taxpayer the largest owner of foreclosed properties. With even more homes moving toward default, Fannie Mae, Freddie Mac and the Federal Housing Administration are looking for a way to unload them without swamping the already depressed real estate market.”

In asking the question narrowly, “how to unload those homes without swamping the real estate market,” the government has been hobbled in trying to identify a solution.  In a welcome change, the government has asked Americans to tell them how to sell these homes without harming the housing market.  The problem has been difficult to solve for the standard problem solvers in the field.  Rather than approach this question as a standard problem solver – i.e. a bureaucrat, politician, or mortgage banker – I approach this question as an inventor.

Ask The Right Question:

For inventors, the critical first step is looking at the facts behind the problem we are trying to solve.  Usually – as is the case here – the underlying facts reveal a far different question than the one people have been asking.

The government never wanted to be the largest owner of foreclosed properties, but in becoming just that the government has stumbled into possession of a powerful tool to speed our economic recovery.  If the government unloads these homes at a pace barely better than “swamping the market”, it will sell them at a loss.  If the government can leverage these homes to drive economic recovery, by the time it sells them it will sell them at a profit.  The government can also use these homes to strengthen our commitment to the military without increasing the military budget.

By narrowing framing the issue as “how do we unload these properties”, the government is asking the wrong question.  The question the government should be asking is “how can we use these homes to make America (and its housing markets) prosper?”  With the question correctly framed, it becomes easy to find good answers and viable options.

“Houses for Heroes”:  Use The Housing Inventory To Ease The Return of American War Heroes Into A Poorly Performing Job Market.

The wars in Iraq and Afghanistan have seen countless heroic soldiers return to the country they served only to find they have traded their noble service for unemployment and even homelessness.  Those we trusted to protect our nation are surely the best tenants we can ask for in maintaining the homes for which the United States is now a reluctant landlord.

I propose a program whereby unemployed soldiers returning to the United States are given highly subsidized (or even free) use of a foreclosed home while they seek work for up to a year after their return, and the rent for some period of time after they find a job (a year seems to make sense) would be adjusted to make sure that their salary, after rent, was no lower than their military salary.  For those who were injured in defense of our country, the Veteran’s Administration should be given authority to extend those time periods as appropriate, in light of the impact of the injury on the ability of the veteran to work.

No child of a fallen hero should be forced to grow up homeless because of a parent’s ultimate sacrifice.  I propose that the foreclosed homes inventory be made available as free or subsidized housing for the children of those killed in defense of our country, under appropriate guidelines established by the Veteran’s Administration.

These temporary uses of the foreclosure inventory should not have a significant negative impact on housing prices.   Indeed, I would expect neighborhoods to see housing prices improve as the downward price pressure of an abandoned, foreclosed home is replaced by the stabilizing effect of a home occupied by the most trustworthy and noble of our citizens.  The program may also be used to permanently reduce inventory by making the homes available with an option to purchase.

While these uses appear at first glance to provide only an attenuated stimulus to the economy, closer consideration reveals a strong stimulus effect.  By facilitating the employment of highly trained returning soldiers, we are helping American companies latch onto years of military training and experience.  Similarly, foreclosed homes are far more likely to be found in economically hard-hit areas—precisely the places where are most promising, well trained employment candidates can make the biggest impact.  Military recruitment would also benefit from such a program. 

As a practical matter, all of these factors are far secondary to the most universal, apolitical, and intergenerational of all American values:   Expressing our gratitude for the freedoms that generations of American soldiers have risked – and too often given – their lives to protect.  We should take this unexpected, tangible opportunity to show the gratitude of our nation for past service, and extend a promise to the next generation of heroes:  When you come home, we will embrace and protect you, just as you protected us.

Unlock The Geographic Restrictions The Mortgage Crisis Has Imposed On The Ability To Move For Work:

My second recommendation addresses a critical problem impeding economic recovery:  A declining housing market keeps prevents workers from moving to take a job.  We should use the foreclosed home inventory to enable people to move to where their skills are most needed.  During the housing price boom, the labor market enjoyed strong geographic fluidity.  If an employer in Dallas wanted to hire a particular programmer who owned a home in San Jose, and that programmer saw the job as a great opportunity where his skills would be much better utilized, it was easy for the programmer to sell his home at a profit and move.  In the current housing market, the programmer would likely be underwater on his mortgage and forced to either pass up the new opportunity or walk away from his existing mortgage in order to take the job.  In either case, our nation’s prosperity suffers.  In the former case, the programmer keeps a job that is not the one he is best suited for.  In the latter case, his San Jose home will add to the inventory of foreclosed homes.  Even where a home has net equity, geographic fluidity in the labor market is impaired by the slow pace at which homes can be sold.

I propose a housing exchange program.  The government should set up a mechanism whereby companies or entrepreneurs with a bona fide need to hire an employee who lives more than fifty miles away can tap into the foreclosed home inventory to make that move happen.  There are many ways to implement such a system, including trading the old house for the foreclosed, new house or making the foreclosed, new house available to rent for free or at a reduced rate so long as the mortgage on the employee’s old house is kept current.  The mechanical details, such as adjusting the mortgage on the new house to prevent a gain or loss in net homeowner equity, are well within the skill set of those in the real estate field. 

I also recommend allowing – and encouraging – private holders of foreclosed homes to participate in this program.  Indeed, although certain regulatory changes may be required to facilitate or even compel participation by mortgage holders, the program could be extended to allow homeowners with negative equity to directly exchange homes with each other.  By improving the inventory of available homes, the reach and efficiency of the program would be greatly improved.

The government could also use this program to reduce the net size of their real estate holdings by requiring that the new (foreclosed) home being traded to the employee have a higher value than the old home being acquired by the government.  I recommend against imposing such a condition at the outset, as it would impair the amount of enhanced mobility that the program would offer to the labor market, thereby reducing the efficacy of the economy stimulus.   However, if the government were to allow private holders of foreclosed homes to participate, the private holders could impose such a condition.

Use The Homes To Stimulate Job Growth or Offset Budget Items the Government Would Otherwise Directly Fund:

The third concept provides the greatest direct cost savings, although it poses the greatest logistical difficulties.  Federal funds directly pay federal salaries and programs, and are used to subsidize numerous state salaries and programs.  I propose offsetting three kinds of federal expenses with creative use of the housing inventory.

Salary Offset and Incentives:  A powerful use of the foreclosed home inventory is to directly provide housing to government employees or those taking a job at the request of the government.  To provide concrete examples, the government has a strong interest in getting doctors to move to underserved rural communities and getting teachers to take jobs in inner cities.  By providing free or subsidized housing for at least the first year of service, such recruitment would be made much easier.  By including a portion of the housing value as salary, direct salary expenditures would be reduced.   Similarly, the need to build additional military housing and state student housing could be reduced by making available an appropriately located portion of the foreclosed housing inventory.

Commercial Office Space Replacement:  The federal and state governments, including K-12 schools and state colleges, are significant consumers of commercial office and meeting space.  The commercial real estate market is in far better shape than the residential market, and to the extent that the inventory of foreclosed homes is sold or utilized in a manner that impacts the real estate market, it is preferable for the impact to be concentrated on the commercial side.  I recommend that the government inventory of foreclosed homes be reviewed to identify properties that are appropriate to use as office or classroom space.  While the federal government can assert preemption as a way to avoid zoning restrictions, I believe that this program should be implemented in a way that complies with the local zoning laws.  Such compliance will significantly reduce the cost savings possible using this approach, but a disruptive change to the character of existing residential areas would have an unacceptably negative social and economic impact.  The foreclosed home inventory may be particularly suited for use as temporary office space.

Temporary Lodging or Hotel Cost Offset: Government employees incur significant costs for lodging while they travel.  For some employees, such as trial attorneys, lodging may be required for extended periods.  I recommend that the foreclosed property inventory be reviewed to identify homes that are appropriate to replace hotel stays of a week or longer (based on neighborhood, proximity to frequently used extended stay hotels and other factors).  Because of furnishing and janitorial considerations, such use should be limited to situations where control over the location can be assigned to a local government office.

Conclusion:

These three uses of the foreclosed home inventory should not be the end of the discussion, but the beginning.  Once the question has been reframed as “how can we use this opportunity to best help our nation”, there will be no shortage of answers.   If the government views itself as an accidental landlord, it will reflexively turn to narrow, inefficient solutions.  By looking at the foreclosed housing inventory as an accidental opportunity, we can chose from a wide array of powerful solutions.

The Senate should not just rubber stamp the House's version of patent reform

The Senate is about to vote on whether to invoke cloture with regard to H.R. 1249.  In all likelihood, that would mean that the Senate would simply end up passing the house version, which (as I argue below) is really bad for independent inventors.  I wrote my senators, Feinstein and Boxer.  I sent the letter by email and, almost anachronistically, fax.  As it turns out, the fax version is the only one they got (at least I hope they got it), since the Feinstein email address bounced and the Boxer email generated an autoreply saying that all electronic communications needed to come via the web based form.  

I will send my senators this link.  If you agree with the sentiments, please feel free to send this link to your senators as well.

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Dear Senators Boxer and Feinstein:

I write to you as a constituent, a small business owner, and the inventor of fifty issued United States patents and hundreds of other inventions that are the subject of pending and soon to be pending patent applications (see http://shuster.com/patents).

I am an independent inventor.  I am proud that I have been able to make a living as an inventor, create jobs, and build transformative technologies, all without the resources of a big corporation – and free of the creative limitations that would accompany those corporate resources.  Unfortunately, a bill that the Senate is set to vote on threatens my ability to control my time and cash flow and properly develop my inventions prior to filing for a patent.  If that bill becomes law, the resulting uneven playing field makes it quite likely that I will end up closing my business and seeking work with one of the large corporations that the bill tilts the playing field toward.

I urge you to oppose the Leahy Smith America Invents Act in its current form.  The Senate bill, S.23, did a lot to weaken our uniquely American pro-innovation culture, but contained an enormous counter-balance:  Section 20 provided that the USPTO would retain the fees paid by inventors, allowing the USPTO to issue patents in a timely manner.  Of my 50 issued patents, two took more than nine years from filing to issuance, and seven took more than six years.  The median time between my filing the first application in a patent family and the issuance of a patent is well over four and a half years. These delays kill jobs, forcing innovators to choose between waiting half a decade for a patent to issue or launching a business without patent protection – and in either case knowing that their patent application will be published well before a patent will issue, providing a blueprint for competitors to steal their idea while the patent application languishes.

Although the switch from a first to invent system to a first to file system goes a long way toward killing the independent inventor, it was a bitter pill many of us were willing to swallow in exchange for a patent office capable of quickly acting on patent applications.  Unfortunately, the House bill has stripped out this counterweight, leaving only provisions that damage or destroy our nation’s small inventors and small businesses.  The provisions that are of particular concern are the switch to a first to file system, Section 18, and the effective reduction in patent term that results from additional incentives to re-examine issued patents.

First to File:

The change from a first to invent system to a first to file system will make every invention into a financial and time management crisis.  The nature of invention is that some inventions come from years of research while others – often the most valuable – come from an inspired moment or observation.  The second category is replete with landmark discoveries, such as Fleming’s discovery of Penicillin, Spencer’s invention of the microwave oven, Schlatter’s discovery of NutraSweet/aspartame, and Hopps’ invention of the pacemaker.  Because so many important inventions are the result of recognizing the value of an unexpected or unanticipated event, at the moment of conception the inventor is often months or years away from fully developing their invention.

With a first to invent system, an inventor can properly research and reduce their invention to practice.  The inventor is not required to file for a patent immediately, so long as they continue to diligently work on their invention and they file within a year of the invention becoming public.  By the time the inventor files for a patent, the patent application will reflect a fully developed description of the invention that others in the field can read, understand, and improve on.

By contrast, a file to file system turns a moment of inspiration into a moment of crisis.  The inventor must instantly consider the viability of the invention; must consider whether his time and financial constraints allow him to turn his full attention to getting the invention ready to file; must compare the actual and opportunity costs of filing against the benefits; and must line up appropriate resources, on an urgent and therefore more expensive basis, to assist in quickly completing development of the invention. 

I have had weeks where I conceived of multiple inventions.  In a first to invent system, such a week is a blessing.  In a first to file system, it would be a curse. As an independent inventor, I simply do not have the resources to simultaneously prepare multiple inventions in the urgent time frame that a first to file system demands. Whereas an inventor working for a major corporation might be able to call several teams of developers and patent lawyers, disclose one invention to each team, and allow them each to urgently rush to file a patent application, independent inventors are forced to pick and choose which innovations to pursue. 

Perhaps most troubling is that in such circumstances, the rational way to prioritize is to develop the inventions that are the least different from the prior art first, since they are the ones most at risk of having a subsequent inventor file first.  The inventions that contain disclosures most likely to advance science are the ones that represent the greatest technological advances over the prior art.  Those inventions are, ironically, the ones that are the lowest priority for filing in a first to file system as they are least likely be invented by a subsequent inventor who files first.

The United States stands alone in the world as the dominant source of new ideas.  It is not a coincidence that it also stands alone as the only major country with a first to invent system.

Effective Reduction In Patent Terms:

Issued patents may already be sent to re-examination based on a substantial new question of patentability.  While the patent is technically in force during re-examination, as a practical matter the patentee’s ability to license or assert it during re-examination is highly impaired.  Regardless of the impairment to the patent’s value during re-examination, the patent term continues to run.  Because of the glacial pace of patent office proceedings and proceedings before the Board of Patent Appeals and Interferences, it is entirely possible that a re-examination proceeding that ultimately results in a determination that the patent was properly issued could nonetheless cost the inventor most or all of the patent’s remaining term.

As the system now works, I expect it to take five years from filing to get a patent issued.  Once issued, even a bogus re-examination request can interfere with assertion of the patent for several additional years.

On top of these two factors impairing the creation of new businesses based on my inventions, the Act appears poised to impose a third:  Post-Grant Review.  Section 6 creates a new type of procedure that, like a re-examination, would interfere with enforcement of a patent.  Unlike traditional re-examination requests, though, a post-grant review request can be based on factors well beyond those that can be used to trigger a re-examination, including those already considered by the patent examiner or even factors that may raise “a novel or unsettled legal question”.

The public policy concern addressed by post-grant review is essentially that the patent examiner may not have had the resources or skill to identify reasons that the patent should not issue, and therefore allowed the patent to issue improperly. This concern has already been addressed in Section 8, which provides for the pre-issuance submission of prior art by any third party.

The crucial distinction between pre-issuance submission of prior art and post-grant review is that a delay in the issuance of a patent caused by the consideration of pre-issuance submissions will be offset by increase to the “patent term adjustment” while a review under the post-grant review procedures will effectively impair the patent while the patent term continues to move toward expiration.  Both procedures allow the public to submit reasons to deny the desired claims.

The delays in issuance and the slow processing of re-examinations under existing law combine to deny inventors a prompt decision on their patent application and then impair the patent after that long-delayed issuance.  Adding a new mechanism to impair the patent, triggered at a far lower threshold, deals an entirely unnecessary harm to America’s innovators.

Section 18:

Section 18 has been criticized as another bail-out for big banks.  Section 18 is that and more – it is a way to prevent small banks from challenging the hegemony of a handful of big banks.  If Section 18 were in place before the ATM was invented, and a small bank invented the ATM, Section 18 would effectively prevent that small bank from using that invention to grow large enough to become a competitor to the handful of existing large banks.

The ATM may already exist, but this is the United States, and we can be assured that sometime soon an invention of the magnitude of the ATM will be developed by an upstart small bank hoping to become an American success story.  Under the Act, though, the small bank would have to wait half a decade or more to get a patent, wade through the inevitable post-grant review proceedings, and deal with re-examination requests. 

When the upstart bank’s patent application is published, some 18 months after filing, the large banks would know exactly how to implement the small bank’s invention.  By the time the patent issued, the big banks would have fully implemented the invention, and the small bank would still be a small bank.

At this point, in any other field, the upstart company could turn to the courts for help in keeping its much larger competitors from getting away with having stolen its idea.  However, Section 18 protects big banks from competition by creating a special, simple to trigger post-grant review and relaxed standards for staying litigation.  Having already waited perhaps a decade to stop big banks from stealing its idea, the small bank would likely be denied judicial assistance for another half a decade while the special Section 18 review proceeds.

Conclusion:

As a small business owner and inventor, I suffer with the uncertainty and glacial pace of the patent process.  I manage my time and cash flow as best I can, knowing that filing for a patent is an investment that pays, in the best case scenario, half a decade later.

H.R. 1249 leaves the USPTO with continued uncertainty about its budget, and leaves inventors unable to count on the kind of prompt USPTO review that the budget provisions in S.23 would have funded. H.R. 1249 burdens the USPTO with a larger workload and the same budgetary uncertainty.

The fix for the slow and uncertain patent issuance process may have been removed from H.R. 1249, but the provisions that harm independent inventors remain.  I enjoy owning a small business, and I take great pride in contributing to America’s scientific progress.  I urge you to vote against cloture on H.R. 1249, to insist on a return to the S.23 provisions on funding, and to seek to remove the post-grant review procedure and Section 18 bank bailout provisions.

Very Truly Yours,

Gary Shuster