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Right to Rent: Helping Homeowners Without Throwing Money at Banks
The basic story was incredibly simple and obvious, at least as far back as 2002. After just following the overall rate of inflation for the hundred years from 1895 to 1995, house prices began to hugely outpace the rate of inflation in the mid-90s. Not coincidentally, this run-up in house prices paralleled the run-up in stock prices.
As was the case with Japan, the United States had a stock bubble and real estate bubble growing side by side. Unlike Japan, where the two bubbles crashed simultaneously, the crash of the stock bubble fed the growth of the real estate bubble in the United States. By 2002, nationwide house prices had increased by almost 30 percent above their trend levels. By their peak in 2006, they had increased by almost 80 percent above their trend level, creating more than $8 trillion in housing bubble wealth.
The inability of economists and the financial industry to see this enormous bubble was the basis for the current crisis. Remarkably, most discussions of housing policy still ignore the bubble.
It is often argued that we need to stabilize house prices. In many markets this is a desirable goal. However, in many markets in California, Florida, and the Northeast, where the bubble has not yet fully deflated, it would be counter-productive to try to sustain house prices at bubble-inflated levels.
Prices in these markets will eventually fall to their trend levels; the only question is how fast. Unfortunately, many of the same policy wizards who wanted low and moderate-income families to buy homes at bubble-inflated prices in the years from 2002-2007, would still want them to buy houses at bubble-inflated prices today. They somehow think that the best way to accumulate wealth is to own a home that is falling in value.
Even worse, they want to use lots of taxpayer dollars to keep people in homes in which they have no equity. Representative Barney Frank is one of the key villains in this story. His top priority is to use the TARP money to pay banks for their bad mortgages, so that people can stay in homes with no equity.
This one is really baffling as economic or social policy. Should we pay a bank $20,000 in order to keep a homeowner in a home in which they have zero equity? How about $30,000? How about $50,000?
It costs a bit more than $3,000 a year to pay for a kid's health care under the State Children's Health Insurance Program. We can all understand the benefit of health care for kids. Is it worth 17 kid-years of health care to keep someone in a home in which they have no equity?
There is a simple no cost, no bureaucracy alternative to Frank's plan to hand tens of billions to banks. (Remember, the banks get the checks under Frank's plan, not the homeowners.) We can simply temporarily change the rules on foreclosure to give people facing foreclosure the right to rent their homes at the market rent.
This is extremely simple and can go into effect the day after Congress passes the rule change. Judges or the court officers handling a foreclosure would be required to ask the homeowner whether they want to stay in their house as a renter. If they say yes, there would be an appraisal of the market rent of the home, and the homeowner would then have the option to stay in the house for a substantial period of time (e.g. 10 years), paying the market rent.
This would immediately give the homeowners facing foreclosure security in their housing. If they like the house, the neighborhood, the schools for their kids, they would have the right to stay there. It would also end the problem for neighborhoods of empty foreclosed houses. And, it would give banks real incentive to negotiate terms that allow people to stay in their homes as owners.
This proposal is very simple and costless. It is also possible to build onto this proposal with mechanisms that facilitate the transition to renters or allow buyback options as Bernard Wasow of the Century Foundation and Daniel Alpert from Westwood Capital have proposed.
But, the key point here is that it is simple to find a way to help homeowners that doesn't help banks, if we are prepared to give the issue a bit of original thought. Fear of original thought among our top policy experts was the problem that got us into this enormous mess. We should not let the same group of failed experts perpetuate the damage that they caused by their fear of thinking.
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13 Comments so far
Show AllThe main problems this idea will face is who is going to be the landlord for there properties? Who is going to pay the property taxes and who is going to do the maintenance on the property. By th time all that is added up the rent will be so high and the 'tenants' won't be able to pay it anyway.
Also, regarding the buyback option. Who will set the buyback price and when will payments start? I see a lot of lawsuits coming up, people claiming the rent they paid for the past 5-10 years should be considered part of the mortgage payment.
Guggzie
I opened the comments in order to ask exactly the same questions as Chameleon - your concept is great but it aseems to lack the indepth followup - looking after the homeowners rather than supporting the banks is a fine idea but; as nwfisher asks - who is the landlord?
If the mortgage contract has been sold on and bundled - who really does own the property????
"The inability of economists and the financial industry to see this enormous bubble was the basis for the current crisis"
Dean Baker is creating a straw man here, inadvertently or not, that enables us to ignore the real problem. The straw man is the economists' inability to do arithmetic. This is easily forgivable as human being are imperfect, right? And so the capitalist exploitation churn continues to churn round and round for another decade. Decade after decade.
The real problem is that incompetence in the power centers is NOT forgivable. We have to apply the Hippocratic oath to all power centers. They must DO NO HARM or be dismantled. If you want to see a model for dismantling power ceters, imagine no military. Imagine no insurance. Imagine no advertisements. Imagine no K St. lobbies.
If you want to break the exploitation cycle, let your common sense guide you to the obvious destination: We have to reject the burden of elite incompetence (and evil). Kaka on the elites! Enough apologies! If you want to do your individual part to dismantle the elite establishment, shift your individual exchange/association away from the power centers and to your local community, to help give the power back to the people where it belongs! Sheesh!
As for the "right to rent". that's insane. We don't need landlords! We demand the right to land/water among other things! No landlords! Write into the constitution all people have a right to own their shelter, rent free! No profiteering on shelter! Sheesh! Get a clue, capitalists!
I want my bailout money.........
http://www.youtube.com/watch?v=Pduy96-kES4&NR=1
I think it would be simpler to just cancel all debt, domestic and global. Debt is evil and keeps so many people under Mammon's bootheel. Few people will ever be able to pay off their debt and all the creditors know it, count on it, and profit from it.
And you know what? I don't think most of the creditors (predators?) deserve their money. Screw 'em. All they do is ultimately swindle people by making them go into debt for things they are tricked into thinking they need in order to be respectable. A house, a car, a college degree, etc. Then they go into further debt for things they actually need because the debt they already have is straining their finances.
Debt forgiveness alone would lift up so many people from poverty, and would go a long way towards preserving family units. How many people get divorced for financial reasons? How many spouses fight over who paid the mortgage? Imagine all of that weight lifted off of their shoulders and imagine happier, more functional families.
Ding, ding, ding we have a winner, I may be an atheist but the medieval Catholics got one thing right when they said usury (charging interest) is a sin. Time for a jubilee:
"One historical recounting looks at the subject of debt forgiveness. As Niall writes, “In the Old Testament Book of Leviticus, God commands the children of Israel to observe a jubilee every 50 years.
The biblical conception of a jubilee was a general cancellation of debts. “Every creditor that lendeth ought unto his neighbour shall release it; he shall not exact it of his neighbour, or of his brother; because it is called the Lord’s release.”
In 1788 BC, for example, about 500 years before the time of Moses, King Rim-Sin of Ur issued a royal edict declaring all loans null and void, wiping out some of history’s earliest known moneylenders.
The economist John Maynard Keynes had repeatedly called for a general cancellation of the war debts and reparations arising from the first world war. Though no such intergovernmental jubilee was ever proclaimed, debt cancellation was effectively what happened after 1931, beginning with President Herbert Hoover’s one-year moratorium on both war debts and reparation"
http://www.efinancialblog.com/history-money-debt-vanquished/
snydly
Yup...
This bailout is the top 1% trying to save the top 1%.
This debt cancellation is a great out-of-the-box idea.
So---screw 'em. Or let them have enough rope to screw themselves by greed.
They will never see the sense in watering the tree at the roots.
Renting can often end up costing more than buying responsibly. Plus, you cannot use your place of rental for tax deduction so you lose. Glad I live out in WY where living is dead cheap !
It depends.
Even if you assume the rent payment is as high as the mortgage, taxes and insurance payment (PITI), you will still be only ahead buying if there is a safe expectaton in the house's apprecuation in value equal to the interest payments less the interest times the applicable federal tax rate. There are few places where such an expectation is safe anymore.
Of course, the monthly rent payment is usually cheaper than the monthly PITI payment.
And at any rate, in many high-market araes (like the DC area wher I used to live) many of us could never afford the down payment and mortgage a house or even a condo, unles we get iresponsibly in debt - with the help of an equally iresponsible bank.
Ther are more important things in life than this home-owning "American dream" in suburbia nonsense.
---USAn---
I hear that more people who work in DC these days are living at least 1 hour away from work, that is the distance is supposed to be 1 hour assuming no traffic.
Millions of empty buildings.
Millions of people living in the streets.
Makes total sense to me.
Where is the compassion?
No room for compassion in capitalism.
Hey don't take it personally its just business.
-- ekaton aka d.k.shaw
My first thought when reading this article was: if I'm renting my house now, who pays the insurance? Who pays propety taxes, mows the lawn, fixes the toilet?
A much better plan, in my humble opinion, would be to legislate that banks will only be able to collect payments on the PRINCIPAL, no interest, of a home loan.
At the beginning of a home loan, payments are structured so that most of the money is put towards the interest. I managed to get more equity in my home by adding a little every month to the payment of the principal. This also reduces the amount of interest you have to pay in the long run, too. But what if we could cancel out all those interest payments and just pay off the purchase price? For most people this would shorten the term of the mortgage as well as reduce the payments by about two thirds (I'm guessing).
The good thing about this plan would be that it not only helps people in trouble avoid forclosure, but rewards those who have been financially responsible with much lower payments as well. So people would be able to keep their homes, and some people would be able to actually PAY OFF their homes much more quickly. Talk about freeing up consumer funds.