There’s another problem with trying to deal with the foreclosure problem – the most obvious solution, mortgage cramdowns, are very unpopular. They failed to pass last spring, and are probably even less likely to pass now. People don’t like thinking that they are rewarding those who made bad mortgage decisions. Very few people have ever come close to trading a credit default swap – every adult has had to make a choice about mortgages over the past 10 years, and rewarding, in the words of CNBC, “the losers” is a political no-go in the United States.
What is another choice? How about “Right To Rent”? Here’s Simon Johnson back in November of 2008 calling what would happen over the next 10 months and then suggesting a version of Right To Rent:
Washington is beginning to turn its attention to housing, and there is progress on plans to make it easier to modify delinquent mortgages where there is a win-win solution for the borrower and the lender.
At best, though, this is only a partial solution. Many homeowners will be unable to afford any mortgage that lenders will accept. Complicated relationships between servicers and secondary-market investors will make it difficult, impossible or illegal to restructure many mortgages…
In addition to limiting the number of foreclosures, it will be critical to manage the flow of foreclosed properties onto the market. Otherwise, the mounting wave of foreclosed condos and single-family homes threatens to push housing prices far below long-term sustainable levels, inflicting unneeded pain on homeowners and the economy…. Here are some ways to facilitate an orderly unwinding of real estate…
The borrower turns over the deed to the servicer and rents the property back from the mortgage investor for some period of time. At the end of the period, the renter can get a new mortgage from the investor at prevailing market rates if the borrower qualifies; if not, the property goes on the market.
I want to take that idea and flesh it out further. I think the best approach is the version suggested by Dean Baker’s, who also originated the idea, described here:
There is an easier route. In recognition of the extraordinary situation created by the housing bubble and its collapse, Congress could approve a temporary change to the rules governing the foreclosure process. This change would give homeowners facing foreclosure the right to stay in their homes, paying the market rent for a substantial period of time (eg seven to 10 years).
This change would have two effects. First, it would immediately give housing security to the millions of families facing foreclosure. If they like the house, the neighbourhood, the schools for their kids, they would have the option to remain there for a substantial period of time.
Also by keeping homes occupied, this rule change can help prevent the blight of foreclosures that has depressed property values in many areas. Vacant homes are often not maintained and can become havens for drug use and crime.
Dean Baker has had this proposal out there for a while, since at least 2007. Felix Salmon had it as one of his Fixing The World Ideas in The Atlantic Monthly. Some conservative economists, including Andrew Samwick have signed on, and there’s a version of a bill floating out there.
So what are the advantages? The foreclosure is avoided, keeping pressure off the community and not displacing a family. The rent is set by an appraiser to the neighborhood renting value, and reassessed whenever either the lender or borrower requests it at their cost. This prevents it from becoming a de facto form of rent control, while the externality effect of people losing the value of being able to sell their home because of foreclosures down the block has gone away, not to mention the more general social cost of abandoned housing.
Now is this a gift to those who made terrible decisions? No. As opposed to a normal foreclosure in most states, it is purposely designed so that any equity built up in the loan isn’t transferred over to the consumer. Normally if the bank sells your house for more than the loan outstanding plus fees in a foreclosure, you get the remainder. Not so with Right to Rent, the bank gets all that upside and the other party gets their equity wiped out.
Some versions of similar plans are designed so the bank is required to sell back to the renter first at a later date; I see no reason for this, as the bank will almost certainly offer it first to the people at the property if they can afford it. If they sell it to someone else however, the person still gets to rent their home. Personally I’d like to see the timeframe for the home rental to be on the order of 3-5 years, though that is debatable. Ideally it would also have accelerated eviction rules, so that people who couldn’t even afford the rent aren’t still living in said property.
This requires no taxpayer funding, and can be done in our very efficient bankruptcy courts. How great of a deal is that?
What are the downsides? It is an intrusion onto the property rights of the lender. The lender can still sell, but will sell with a tenant attached to the property. For the time being, the social costs being accumulated by neighborhoods as properties sit vacant is devastating, enough so that we need to take action. Lendors will become landlords, though there are a lot number of civic groups, third parties, businesses, etc. who can contract that labor out if it can’t be done in-house.
What are your critiques? Thoughts? Personally, in terms of our current political dialogue, I wonder if the type of social conservative who is willing to lock up large segments of the population to prevent a “broken window” from forming would be willing to ask a lender to take a small haircut to save the entire house from rotting in foreclosure, windows included. Nothing increases the “disorder” of a neighborhood than having foreclosed houses rotting away on them…
The Baseline Scenario 
Personally, in terms of our current political dialogue, I wonder if the type of social conservative who is willing to lock up large segments of the population to prevent a “broken window” from forming would be willing to ask a lender to take a small haircut to save the entire house from rotting in foreclosure, windows included. Nothing increases the “disorder” of a neighborhood than having foreclosed houses rotting away on them…
I doubt it. Conservatives are all about punishing the poor (and feeding a corporatized prison-industrial complex which is often tantamount to a slave labor system). This is lucrative and pleasurable for them.
They do not at all care about disorder as such, except where it provides disaster capitalist opportunities, and they certainly do not, under any circumstances, want to ever for a second even hint at mildly inconveniencing any kind of feudal property owner.
That means, among other things, that the property interests of actual homeowners in keeping a neighborhood from becoming blighted mean nothing, while the interests of absentee deedholders are sacrosanct, even if the result is turning whole neighborhoods into burned out wastelands.
That’s what allowing the economic Right to run wild has done to America. (Among a thousand other acts of treason.)
To put it into context, the real losers are the note holders of non-performing assets, ie the 77 failed banks, investment houses and insurance companies. The solution is to deleverage and quickly, no moratoriums, no loan mods, and no shifting of private debt into public debt. The foreclosure process in each state is the answer, any extensions just help out the losers. If anything, the states should enact new legislation specifying that no foreclosed home be unoccupied for longer than a one year period (beginning at the NOD filing) or else the property goes to the tax auction, and yea.. any overages can go back to the note holder of the troubled asset. With so many homes up for sale then we would truly see a buyers market and homes would drop in value to a point where homes would sell at a debt to equity ratio that isn’t going to imprison homeowners in sea of debt for 30 to 40 years. And, instead of the trickle down infusion of fiat cash from wall steet down to main street, Congress should give a huge tax credit to the homeowners who are in negative equity positions just to say thank you for a staying in your situation.
My apologies for ranting
cheers mate !
One of the thoughts that occurred to me reading this is if all the people who CNBC defines as “losers” had used that money they spent on their cable bill on other expenditures (like paying the credit card balance) would CNBC change that definition of “loser”?? I went through a small stage in my late teens when I loved watching the ticker tape at the bottom of the TV at the closing bell. Other than that, CNBC is and has always been a giant pile of cow dung. Louis Rukeyser, we miss you so much. God bless you and your father’s souls in heaven.
The problem would be the continuing risk of the occupant not paying rent. The NOD goes out because of non-payment, anyone would be rightfully leery of renting to someone who is currently not paying for the property. To mitigate: you set up a 3 month test period pre-foreclosure where the occupant would have to make insufficient to cover the mortgage, but at the agreed rent.
It is pretty much a win-win-win. The bank will get more selling a property with a built in renter, the flipper/landlord won’t have to prep or look for a renter, and the occupant won’t have to move.
These changes would be most useful in low-end condo/townhouse type units which have already mostly worked their way through the system. I would want to see a cap on the initial property price for the program, and it needs to be limited to actual occupants. So many of the current foreclosures I see in FL are with speculators whose mortgages did not have 2nd home riders and were not paying a premium through higher down payments and higher interest for non-homestead properties. The right-to-rent has no impact on those.
Banks are not really innovative when it comes to a customer-service intensive type program as this would be. They already can’t handle the foreclosures as they are, I do not imagine them able to work an even trickier one. The govt should offer to hire people & contract them out to banks to help work thorugh fc’s. Most of these programs require real human work, and it’s sad with unemployment where it is, we can’t match up workers to these tasks.
I think this is a good idea, but how would this work in neighborhoods where there are existing rental restrictions due to an HOA? Additionally, what would the impact be on lenders who won’t approve mortgages in neighborhoods with more than a certain percentage of rentals?
As someone who generally describes himself as an economic conservative, I think this proposal has a lot to like. As others (Baker, Samwick, Salmon, yourself…) have pointed out, it mitigates a lot of the devastating effects of foreclosure (both public and private) without the moral hazard problems of bailing out overleveraged borrowers.
I think the biggest problems with this are practical. Since the owners of mortgages (i.e. MBS holders) are so dispersed, it’s very costly for them to come together to put this sort of solution in place. On top of that, banks generally are pretty averse to becoming landlords, even if the alternative is to be stuck with selling the property at a loss.
As a result, this needs to be done through legislation. And given with the debates / ridiculous changes we’ve seen on health care, cap and trade, etc., I’m skeptical that congress can do it.
I confess my ignorance on this one–in this environment of fallen home prices, is there much equity left in a foreclosed property? It seems to me the opposite is usually true. If there were equity–real equity, based on market price–why let the property go into foreclosure? Sell it and move on. The problem is that most “equity” in distressed properties is phantasmal, based on zillow.com estimates at the top of the bubble.
I want to say that I am not deaf to cries of “unfair” when it comes to bailing out irresponsible borrowers. My wife and I lived in our 70-year old, 1200 square foot bungalow all through the boom times, never paying more than 20% of our income for housing (and a lot less in the good years). It rankles to erect government programs to keep starry-eyed dreamers in their McMansions. It stinks, in fact, but a lot stinks about 2009, and I suppose I can see the necessity to choke down my bile about something like this. But it’s a damn hard sell.
Why interfere with contract rights? There is an easier way. Just foreclose and have the would-be renter move to a rental home. There are three negative aspects of this solution:
1) it pressures house prices
2) the renter absorbs moving costs
3) the renter may not find housing due to bad credit
Take number 1). The “pressure” on housing costs is part of a market-clearing process. Lower prices yield, all else equal, lower rents. This should BENEFIT the new renter, not hurt him. We are seeing this played out in San Diego as investors buy foreclosures and put them out as rentals.
On the second item, I propose a government tax credit for post-foreclosure moves. Easy, clean, and temporary.
On the third item, I propose legislation that that a credit rating agencies provide scores excluding foreclosures, and that these be used for purposes of rental applications.
There: two easy, small pieces of legislation, and we make sure that foreclosures do not equal homelessness or even a significant decline in the quality of one’s housing post-foreclosure.
Now, if what you really want is to prop up house prices, then of course, your proposal is better.
I think a case could be made that this proposal is ALSO benign paternalism towards the creditors. Bearing in mind the almost complete absence of a first-loss equity cushion, the current level of avaiable inventory, and the problematic condition of foreclosed and vacant properties, it’s their own institutional inertia (“Banks are not property management firms”), legal/regulatory obligations to noteholders, or the willigness to play chicken with the owners and/or the housing market that prevents them from arriving at some variety of this solution.
Interesting idea. It seems that in the short term it might delay the point at which housing prices normalize. But longer term, if this remains in effect, banks will be cognizant of this and institute more careful lending practices (as they are now, but that will end at some point).
I think the proposals miss the big picture, that is, the housing market’s need for price discovery. True, the fair value of rent for the neighborhood can be determined, but what do the plans do to solve the problem of phantom inventory?
Home prices need to find their bottom, and creditors need to take it in the shins.
That is why the cram down proposal should be revived. The homeowner stays in the home, the creditors are wiped out or haircutted, and the rest of us know what the home is worth.
How nice.
You wish to use the police power of the government to punish mortgage lenders and reward negligent borrowers.
Why stop there ?
Since you best understand how voluntary economic contracts should be voided or forcibly redirected — your wisdom & mandates should be applied to the entire national economy.
The biggest problem would be managing widely distributed properties.
1) Lender has to find a local management company in each area.
2) As mentioned earlier, what happens if the renter fails to pay rent on time and consistently?
3) What about damage, maintenance, etc…? I don’t see lenders wanting to get into that game or being very good at it. The renters would have zero equity stake in the house, so damage would be highly likely.
This strikes me as another one of those seemingly simple thought experiments run by people who never have to execute the details.
Who collects the rent, who takes the phone calls when the “tenants” have problems, who decides how to maintain the properties and who pays for the repairs/new roofs/water heaters/etc., who handles the evictions, how is the property booked/taxed; do the banks now set up property holding companies. Where does the capital come from for that? Are you going to set up a new government agency to monitor the quasi renters and are you going to make the regulations simple enough that those gov’t employees can actually address the problems as they arise.
Nuf Said….
This is lucrative and pleasurable for them.
No they do it reluctantly out of an overabundance of compassion. The fact they make gobs of money off it is little consolation to their sensitive souls.
That’s what allowing the economic Right to run wild has done to America. (Among a thousand other acts of treason.)
No, it’s all the Socialists’ fault. They’ve been in power since 1980 and look how they’ve destroyed the country!
I’m with you Gerard. Contracts are sacrosanct. They can never be renegotiated for any reason.
Bravo, Kena. Details matter. It’s easy to sit around and postulate grand schemes, quite another to actually make them work.
This is just one more academic exercise that puts off the inevitablity of clearing the housing market and getting back to fundamentals.
I miss Louis Rukeyser too. I feel like we’re in a bear market because he died.
According to the lenders, the prices you find through this free-market process are not the “correct” prices.
jawoll – pity they ever abandonned this http://en.wikipedia.org/wiki/Poorhouse
Good points. The proposal ignores the fact that renting/absentee landlord-ism is detrimental to property values in most single-family neighborhoods.
Sure, so is foreclosure. But foreclosure puts another owner in the property, not a renter. And while the foreclosure process lowers values in the short term, renter populations lower them for good.
This may work fine for condos, or lower price properties that are already in mixed-rental neighborhoods. But the typical American subdivision of $350k (now $250k) houses isn’t going to be preserved by renting.
Right-to-rent:public option::cramdown:single-payer
This repeats the tenant farmer situation of the Gilded Age. I think this proposal already gives away the negotiation, which should permit cramdowns in consumer bankruptcy of their first residential property.
The best result for everybody is a debt restructuring. CNBC can call these people losers, and you can sing of the sanctity of contract, but the bankruptcy process hands out “haircuts” all day every day in almost every other context.
Oh, and also, Article I of the Constitution explicitly empowers Congress to make all necessary and proper laws relative to bankruptcy, so nebulous Lochner-era arguments about sanctity of contract need not apply.
Right to Rent is happening. As more and more mortgage modifications extend the payment period, the prospect that “homeowners” will actually pay off their mortgages before the termination of their normal life cycle is going down. Even selling a home under these circumstances in 5-15 years basically means that home debtors will leave with no equity. So, how is this different from renting?
Mike, this is a truly bad idea. A defaulting occupant already has the right to rent the property – he can offer a deal so attractive to the foreclosing party that the foreclosing entity chooses to accept it.
To interject a government right – to try to extend rent control to part of the purchased housing market – requires that the rent be LOWER than the market clearing rent. Why this benefit should be delivered to a person who has defaulted on his original contract is beyond me.
http://tauntermedia.com/2009/08/05/right-to-rent/
How does that tell you what the house is worth.
Evict the occupant, auction the house, and then you will know what the house is worth.
Why would a renter pay rent at all? He refused to pay his mortgage and, far from suffering any adverse consequence, was handed a below-market rental. What is the government going to do if he doesn’t pay that amount?
You could as easily require banks to auction properties with no reserve on some short time frame (eg 90 days) from receiving the property in foreclosure.
It prevents the zombie property scenario you describe, encourages immediate price discovery, and creates a situation where the defaulting occupant and the bank have a reasonable conversation about modification (because the alternative to a negotiation is a prompt auction and recognizing the loss, not parking the asset).
http://tauntermedia.com/2009/08/05/right-to-rent/
“Renegotiated” is an interesting word choice. It almost sounds like the two parties to a contract are, by themselves, talking about entering into a mutually acceptable revised agreement relying on the background of predictable legal consequences to their interests should a new deal prove unachievable.
It doesn’t sound at all like some infinitely powerful third party get to essentially void the preexisting arrangement and dramatically rewrite duties, obligations, and economic rewards in favor of one side.
Nope, no potential for corrupt abuse of political power in favor of special interests here – just folks “renegotiating”. Move along, now, move along.
First of all, I thought the taxpayer ponied up 750 billion last October to solve this problem? Guess not. Second, if the economy is ever going to recover we must stop interfering with market readjustments. Real estate is still too high in most markets because sellers are unconvinced the party is over. Foreclosure is a healthy process. We need to accelerate it. Bailing out the banks was bad enough. It has been a collossal mistake. Don’t compound it.
In our area, median home prices (with a 30% discount to 2007) are about 400,000 which would suggest a mortgage payment of abo8ut 2600 (30 year fixed) and taxes of about 14,400 or 1200 a month for a total of 3800 a month carrying costs.
Market rents, however, are about 2000 – 2400, which is why people rarely rent their houses.
So what rent do you charge the person living in the house and if you charge them market, are you forcing the lender (new owner) to rent below carrying costs for such a long period of time?
Now, I understand that the lender (new owner) doesn’t have the mortgage carrying costs, but the buyer (if the buyer were forced to keep the arrangement with the renter) would.
This would seem to lock the lender (new owner) into subsidizing the property for whatever period you design. Then it’s a cash flow problem. The rent would barely cover taxes, and little left for maintenance. It might be a slower drain on neighborhoods, but a drain none-the-less.
Meli,
Your numbers strike me as pretty good (though the taxes seem high–unless you live in Cook County and are paying high rates on peak valuations). On the other hand, banks are getting money basically for free these days at the Fed window, so they aren’t going to pay any carry costs and get to pocket the steady cash stream plus any appreciation from the sale of the asset in a few years’ time. ALso the bank/landlords will have an advantage in negotiating downward pressure on property taxes which the old homeowner/creditor did not.
These arguments about deadbeat renters are really hollow, by the way. Give it up. You don’t pay rent you get evicted. There’s no magic here. If people can’t pay the rent they won’t be long in the house.
Contracts are renegotiated every day, for every reason. They are also changed by government, every day. Ever hear of bankruptcy?
Not only have I heard of it, but I oppose it for all but the largest corporations. I’ve also heard of debtors prisons, which should be reinstituted as soon as possible for everyone else. Prisons can bring back the jobs we so desperately need.
Yes, the government should never step in and protect one party from their own stupidity. In fact, they should only gang up with the stronger party against the weaker. That’s why I’m in favor of debtor’s prisons as a solution to this. With lengthy prison terms, you can bet that the forclosure rate will plummet.
HOAs and condo associations are already going bankrupt because the banks refuse to pay fees on foreclosed properties, and increasingly, even to take title. They’ll be pleased to learn this will continue for another 7-10 years.
do you mean to say the stronger parties didn’t act stupidly?
that all those financial wizards had the great picture allright all along?
If yes, then why is their superior wisdom not disseminated to those hit by it?
That would lead to an unacceptable state of affairs where banks lose money.
You’ve got it, Jon. We are perpetually proposing “compromises” (co-ops?) that are as or more invasive than the correct solution, without the benefit of actually working.
I don’t think most people even understand what a principal cramdown is, on a basic level. That’s it’s part of bankruptcy, not a free giveaway; that judges have had the power before, with no ill effects; and that it’s permitted on virtually ANY OTHER LIEN, with a special exemption for residential mortgages that was granted to the banking industry because it pleaded before Congress that it was trying to “help people buy homes.”
Cramdowns are no gift to homeowners. It’s a bankruptcy proceeding, so their credit is shot one way or another, and their repayment is strictly supervised and not conducive to a festive lifestyle. What cramdowns really offer is a way to deleverage that’s fair to all creditors, by letting the bank pretend that its loan is still secured by collateral that really isn’t worth anything near what the note says. The bank elbows its way to the head of the line, on a lie.
You know what I really think is behind these rent-to-own proposals? Foreclosures are just now reaching the affluent neighborhoods occupied by the people who propose them.
Right now banks are not able to keep remotely current on evicting foreclosed homeowners. In some areas former owners are enjoying 6 months to two years of rent-free living. Suddenly they’ll be able to evict deadbeat tenants with clockwork precision? Despite the fact that regular eviction proceedings in many states take as long as, or longer than, foreclosures?
I had a dialogue with Dean Baker about this back in 07 when he first floated the idea on some website where these points probably still reside. I have three objections:
1) it is easy to write “the market rent” and pronounce the problem solved. But empirically, the determination of “market rent” has been a bureaucratic nightmare. Rent control boards are disasters. What is “the market”? In most of these neighborhoods there are no rentals going on and certainly not enough to call it a market. What is the market rent in out years, given that the rental market becomes affected by this program. Do you do it house by house and do differences in condition matter? How do you do it, period? Does it involve legal processes? Lawyers? While they’re battling about the “market rent”, what happens – how much gets paid? Do you leave eviction rules in effect for nonpayment – how many bites at the apple does someone get, given that this would be itself a debt relief method? Does this become a federal program – do federal rules preempt state eviction rules or become subordinate to them? Are you creating a set of federal landlord-tenant courts? How popular will that be? What are the costs of all this?
2) Ten years? You’ve got to be kidding. That only proves point 1. You’re setting up a permanent nationwide rent control bureaucracy and an ancillary network of lawyers and so forth who make a living off of the program.
Far more efficient to just mail out some checks and see if it helps tide people over.
You don’t want exactly one period for the rental, and that would mean most of the foreclosures would come onto the market at the same time. Instead the rental period should be determined by a calculation that has the effect of spreading out the end of the lease period. For example, you could use the degrees of underwaterness or something.
It is a preposterous politicking idea dreamed up by our our socialist bureaucrats seeking re-election. Nothing more, and won’t work, even in a perfect world. It destroys the mechanics of a free society.
Kena is 100% correct. Finally, imagine trying to evict these ‘renters’ when they decide they’ve had enough of renting and want to try out “Plan C”, i.e. free rent. In many states it is nearly impossible for a ‘normal’ landlord to evict tenants. Can you imagine how the courts will hesitate to evict former owners??!! It will be a nightmare.