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TechnoratiStopping Foreclosures With the Right to Rent: One More TIme
Politicians often prefer complex solutions to simple problems. Nowhere is this more apparent than with the long list of complicated and convoluted proposals to address the country's foreclosure crisis.
Millions of people face the loss of their homes over the next few years. While the politicians in Congress have developed a wide variety of complex schemes in order to hold back this flood of foreclosures, including one passed into law last summer that provided up to $300 billion guarantees for new mortgages on homes facing foreclosure, none have had much impact thus far.
The unavoidable problem with these schemes is that it is difficult to design a plan that aids families facing foreclosure without giving an incentive to other homeowners to also default on their mortgage. In addition, it is hard to justify taxing the people who are struggling to keep up with their own mortgages in order to help those who default. It is even harder to justify taxing ordinary people to help out the bank executives, who issued hundreds of billions of dollars of bad loans.
As a result, to date these programs have not prevented a tidal wave of foreclosures and evictions. The number of foreclosure filings (there are typically two or more filing for every actual foreclosure) is now approaching 300,000 per month.
For those not offended by simplicity, there is an easy solution. Congress can temporarily modify the rules on foreclosure to give families facing foreclosure the right to rent their homes at the market rate for a substantial period of time. Rep. Raul Grijalva proposed such a change in the Saving Family Homes Act, which would allow homeowners the option to remain as renters for up to 20 years following a foreclosure.
This bill would immediately give families security in their home, so that if they like the home, the neighborhood, the school for their kids, they would have the option to stay in the house for a substantial period of time. This also has the great benefit for the neighborhood that homes will remain occupied.
Perhaps more importantly, this change in foreclosure rules will give banks a real incentive to negotiate conditions under which homeowners can stay in their homes as owners. Banks do not want to become landlords. The bank will own the house after a foreclosure, but a house with a renter is worth much less to them than a house over which it has complete control.
Giving the homeowner the right to stay as a renter hugely increases their bargaining power with the bank. The result of this change in foreclosure rules is that far more homeowners are likely to remain in their homes as owners.
The beauty of this sort of proposal is that it is simple, can take effect immediately, it requires no taxpayer dollars and no new bureaucracy. It also is not giving anyone a big bonanza. Homeowners are not likely to line up for a process that could end up with them being renters. And the banks will obviously not be thrilled about a rule change that will leave them worse off in trying to squeeze money out of homeowners.
While the basic point of the right to rent is simple, it can be extended in various ways to further aid homeowners. Bernard Wasow, at the Century Foundation, has proposed some additional measures to facilitate the transition to rental status or possibly a return to ownership. Daniel Alpert, of Westwood Capital, has a somewhat different version that creates a mechanism for homeowners to buy back their homes after five years.
In short, if people want to add bells and whistles, it is easy to do so. But, the key to stopping people from being thrown out of their homes is simply to change the law that allows people to be thrown out of their homes. That one is so simple that even a policy wonk should be able to understand it.
18 Comments so far
Show AllExplain to me WHY I should feel sorry for any moron who bought a home he could not afford after 2005? Explain why I should show sympathy for some fool who has a foreclosed home, but a nice Hummer he bought on a home equity line of credit?
Screw these people. The parks are large, they can sleep there.
I won't comment on your simplistic appreciation of the complexity of the issue.
I'm not sure about your town, but where I live, there has been a virtual elimination (no exaggeration, an ELIMINATION) of rental housing, due to most of our apartment buildings (four-plexes to 20 unit buildings) being converted into condos.
This complete lack of decent, affordable rental housing has forced people to look into the possibility of buying- only possible by getting a home loan.
Wtih easy credit and too-good-to-be-real terms (NO money down!!) being pushed by lenders and real estate people, this obviously led to many more people seeking any option that would get them housed.
The cynical and unscrupulous way banks & developers exploit people's lack of understanding of the intricacies of the home-buying industry is one of the biggest problems of capitalism: housing is treated as a luxury, not as a basic human right.
The auto industry is another twisted industry.
If you watch T.V. on any given night the sheer number of ads for luxury cars is impressive. There is an enormous volume of cars parked, un-driven, on the vast acreage owned by car dealers. Just part of the ugliness of suburban sprawl that we put up with and that exists in every U.S. city. Who needs this many cars? If there are THIS many cars just sitting around not being driven, why are they so expensive?
Then a more mysterious question: why do men even think they need to drive Hummers? That's a whole other story. I have a theory, but I won't go into it here!!
While the stereotyped distressed baloon mortgage holder is the irresponsible spendthrift white McMansion dweller in outer suburbia, the truth s quite different.
Actual distressed mortgage holders are largely poor to lower middle class, who fell for the RE agents sales pitch, or advice of misguided friends, that home "ownership" was the the only path to long-term financial security. Renting was only for chumps who resigning themselves to permanent poverty sending their money every month to a landlord instead of equity in a house. No one mentioned that for the first 20 years, the situation of home "ownership" nearly the same - It just your money goes to a bank instead of a landlord.
I know, because while 52 years old, I had to suffer all the the years of advice of people who told me I HAD to buy a house or I would never have financial security.
I finally only bought a house a couple years ago, and only because of a very steady job, the availability of cheap houses in Pittsburgh - the mortgage payment on a 15 year note is as cheap as rent on a 1 BR apartment, and there was never a bubble to burst here.
---USAn---
I think the idea of letting people rent their (own!) homes is principally very good but I am afraid the legal proceedings will not be so simple and, as Mr. Baker has pointed out himself, banks do not want to be landlords and even if they did, who wants to have a financial gambler as a landlord?
(Mr. Baker reported earlier that for each dollar of disposable income, American housholds have now 5 dollars of debt)
As a European, I am appalled that the income disparity in the US is now so great that millions of people are heavily indebted just to keep up their living standard, pay for their kids education, or buy a house, and that on top of an inefficient and very expensive health care system, their pensions are now also in danger. Mr. Obama is now presiding over an astonomical mountain of debt bequeathed to him and his good intentions by a cunning Mr. Bush, the Treasury and the Fed....)
HOW MUCH IS A TRILLION? FIND OUT AT:
http://www.chrismartenson.com/crashcourse
For a more sophisticated analysis of the economic and social disaster we are facing (to say nothing of the environment..) go to:
http://www.henryckliu.com/
The current issue of the German weekly magazine DER SPIEGEL is focusing on the fallout of the "capital crimes" (title) better known as "structured finance". The cover story explains how the insane derivatives trade has ruined the lives of many people on both sides of the atlantic. Naive German pensioners lost all their savings because they trusted their banks advice to buy Lehman certificates ("absolutely safe") and other financial products they did not even begin to understand. Even provincial churches have lost most of their investments (more than 4 million EUR in one case). The report shows how interconnected the fates of these people have become through "financial deregulation and globalization"...
The article also tells the personal story of two American couples in Ohio, both facing foreclosure claims from the Deutsche Bank National Trust. But Deutsche just bought credit derivatives, it did not issue the original loans and the borrowers were not informed, that their payments were "sold" as "assets" to someone else let alone would they have imagined that their loan, together with thousand others had become the object of intense speculation in the form of bets whose inventors claimed that they "separate the risk from the original loan..!"
One couple in this case hired a lawyer who filed a lawsuit against Deutsche Bank, claiming they could not prove, that they were a legal party to the loan contract and he won the case! My question is: How can these buyers of mixed tranches of CDS, CDOs, etc. prove that they have a title to thousands of houses? Is it legal to sell these mortgages as instruments of financial speculation without informing the borrower?
In this controversial video (dealing with basic monetary policy, the role of central banks and the fractional reserve system as a generator for perpetual debt...) even the mortgage contract itself is called into question: (minute 18 >> of the clip)
http://video.google.com/videoplay?docid=7065205277695921912
In 1969, in a Minnesota Court Case, a man named Jerome Daily challenged the foreclosure his home by the bank by arguing that the bank did not put up real "consideration" (legal jargon for each party having to put up a legitimate form of property) and he also won the case! The judge apparently accepted the argument on the basis of the fractional reserve system, since the credit money did not really come out of the banks assets but was created out of thin air...
Last question: If the borrower can prove that he was misled about the true cost and risk of his loan contract (predatory lending), is it not possible to annul the contract?
My suggestion is: eliminate the interest on mortgage loans for actual family homes: let people just pay back the principal and a small administration fee
The principle of compounding interest is the greatest rip-off and the banks make millions out of thin air...
"If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them, will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered."
- Thomas Jefferson
"When the President signs this act, the invisible government by the money power will be legalized."
- Congressman Charles Lindbergh, Sr. to Congress after the vote on The Federal Reserve Act
Folks,
People with equity in their homes don't get foreclosed on, so that is a non-issue. The people who are being foreclosed on are underwater in their mortgage. In some cases they may be underwater by more than 100k. In the vast majority of cases where foreclosure is a big problem, the rent would be much less than the mortgage. We have tons of material on this issue in the housing section of our website, www.cepr.net
Simply not true in the general sense you portray. People get foreclosed on because they cannot pay the bills- regardless of equity they may have. You cannot pay bills with equity - it must be converted first.
Although it is generally true, if there is ENOUGH equity in the home, they could possibly sell to pay off some or most of their debt and avoid a foreclosure. But it should be obvious that refinancing to capture their equity is rarely an option if they can't pay the bills in the first place. Especially in todays tighter credit market. It is also the case in some instances of accrued medical bills or the like, that there is not enough equity available to pay off the debt anyway. And all that assumes that they could sell for enough to realize the full extent of their equity in a timely manner, since bills are due each month.
To the point, most any real estate investor realizes there are plenty of properties with more equity than debt attached, and specifically target those owners that cannot afford to hang on, specifically to make a favorable investment at discount. It's the American way.
Also, equity is more perception than anything. It represents the difference between what is owed and what the property MIGHT actually bring in a sale. In short, equity has very little to do with paying the bills and is often illiquid.
The number one reason people default on their homes is because they have outrageous medical bills. If we had single-payer universal health coverage, that would sharply cut the amount of foreclosures. The other reasons people can't pay? Their heating and food costs are too high due to the "Oil we eat/heat".
As I'm commonly saying in both my career and on this site, "Treat the root of the problem and you won't have to keep trimming branches."
Universal, single-payer, not-for-profit, health care would solve a lot of our ills.
l do feel the pain of those stuck because of illness, job loss, or a big jump in interest rates but lately l here a lot of stories of many people who played monopoly with OPM ( buy now for $ 200K sell in 6 months for $ 300K ) and now have mortgages on several houses, and people who kept kiting their increasing equity (Hey Hon lets take that SUV we bought with our equity loan down to Best Buy for a HDTV when we get back from that cruise to Europe.) Too many of my generation couldn't settle for a cottage in the 'burbs and had to have an Estate home in Yorkshire Woods.
Forget rental schemes, especially at fair market value - for some that would be even more expensive.
The bailout should be implemented this way:
- don't require foreclosure or long-term default before helping, only financial proof that homeowner cannot make required payments
- gov't then buys the mortgage from the failing lender at a fair investment value, just as if the loan is still in good standing
- gov't then freezes the unpaid principle balance still owed by the homeowner, except as noted here
- gov't negotiates annually or biannually with the homeowner for a new discounted interest-only payment based on the homeowner's actual ability to pay (this is very similar to a function already performed by HUD under section 8)
- if the homeowner's ability to pay is below a minimum monthly amount (say bank discount rate plus 1%), add the difference to principle
- allow the homeowner to defer payments, penalty free, but subject to both annual and lifetime caps
- the homeowner may make additional principle payments at any time
- the gov't makes the loan agreement assumable, and permits a sale or transfer of the property only on assumption or satisfaction of the loan in full
- gov't makes the loan term open-ended, (say 30-50 years) but requires loan restructuring with traditional fixed rate terms when homeowner or buyer is able.
This schema avoids actual foreclosures all together, enables homeowners to keep their homes, allows lenders to avoid losses on troubled loans, enables the gov't to earn interest, and preserves the value of the home and neighborhood. The terms are far more manageable and can actually help create opportunities for new homeowners, in an otherwise tight credit market.
Very true. The mortgage on the home I'm currently in is about $750. The equal rent value of my home would easily be in the $2000.
Bankers always claim that the last thing they want is to foreclose on a property. Yet, they made predatory loans with terms so onerous and complicated that most homebuyers did not understand what they bargained for. Default was very thing the bankers wanted. It's time to end this stupid notion that regulation is bad.
The short term is going to be ugly. The short term will last for at least a couple of years.
The only long term solution is to make the financial industry the most regulated industry that the world has ever seen. The industry has proven itself so corrupt that bankers should not be allowed to go to the restroom without notifying the government.
Exactly Frank and Mammon,
This is the lamest suggestion I've ever heard. I'm surprised that CD would post it. It's total crap. Ask if I'm intereseted in paying rent on my place instead of building equity, and losing all equity I have to those bastards on wall street.
There is a simpler answer (simple, but not easy 'cuz the big $$ bankers will oppose). Reinstate usuary laws and reinstate REASONABLY personably bankruptcy laws. Allow bankruptcy courts to rewrite mortgages so they are affordble. The bankers call this "cram down" ... I call it common sense. If the bankers want "cram downs," we can use railroad spikes.
~~~~~~~~~~~~~~~~~~~~~
"There's no such thing as a winnable war, it's a lie we don't believe anymore."
Sting, Russians, 1984
"The result of this change in foreclosure rules is that far more homeowners are likely to remain in their homes as owners." DB offers no proof of this - if a "home owner" can't afford $1000/month mortgage, then how could they afford $1000/month rent?
Other things DB doesn't mention: who pays the property taxes on these homes once they become rentals? The bank, obviously, since they would be the owner of the property. What bank would be willing to accept both a lower monthly payment (say, from $1000/month to $800) and a new property tax bill (anywhere from $300/month to $2500?) Answer: none.
DB also assumes homeowners living in the house for the length of a mortgage - 20 or 30 years - when the average homeowner actually sells within 10. So the bank looses money and gets stuck with the house, too?
Plus, there's the maintenance - in a typical house rental, the owner is responsible for the big stuff. No bank wants that responsibility, so they would have to trust the renter to take care of it. But, chances are, if the renter was unable to afford the mortgage, they probably can't afford that new roof, either.
IOW, a nice thought but wholly unworkable. The only answer is this: re-price houses at real value (before the bubble inflating,) let banks write off the difference, then have them re-finance at the real price.
Too little, too late, won't happen. How about pushing the stress back upstream?
Dear Subprime Lender:
Our household has not been immune from this 'economy thing' and, as a result, our mortgage check will be somewhat delayed. Our financial resources have finally dwindled to the point where our ability to make payment is affected. Our living expenses have been cut back to the basics and we're still cash short to cover the mortgage payment, which is our largest expense next to taxes. We will resume paying the mortgage when our financial situation improves. It's not like we haven't been trying. It has been and continues to be very frustrating.
You may decide to proceed with eviction. Before doing so, you should know that we consider the dwelling our home and home is very important to us. Since those events that control the economy are way beyond our control, we don't plan to suffer disproportionately for something that's not entirely our fault, and since there is no safe haven from this 'economic thing', we prefer to stay in our home until whenever. You have the power to initiate or to not initiate the use of legal force that will be required to remove us from our home. Should you initiate the use of force or harassment, at whatever level, you will share proportionately. Friends who share our outlook and temperament are aware of our situation. The level of escalation is your call.
Please don't take this personally, these are just business risks that the bank must have, or should have, considered when investing in people's homes. The business climate has certainly changed.
There's no place like home.
Sincerely yours,
Subprime Debtor
http://theformofmoney.blogharbor.com/blog/_archives/2007/4/13/2878726.html
Mammon,
What a perfect idea! Thanks for posting this letter.
I've been thinking that people should resist these foreclosure evictions and have heard of only a few places in the country where people faced with eviction have gotten community support (even blockades and civil disobedience) to help them stay.
Those who show up in court later at an auction to buy the foreclosed homes at bargain rates should also feel the severe heat of the community's anger.