How to Solve the Housing Crisis
Rather than throwing families out of foreclosed homes, US laws should be changed to allow them to stay and rent
Winston Churchill supposedly said: "You can always count on the Americans to do the right thing, after they have tried everything else." This may prove to be an accurate description of the response to the foreclosure crisis that has followed the collapse of the housing bubble.
The folks in Washington have developed a series of complex mortgage modification schemes designed to keep people in their homes. George Bush put forward the first plan in the summer of 2007. It was entirely voluntary for lenders and came with no government money.
Last summer, Congress developed a package that committed up to $300bn in loan guarantees to support modification efforts. Eight months after the plan went into effect, there were fewer than 1,000 applications and only 52 completed modifications.
The most recent set of proposals came from President Barack Obama in February. This plan focused more on giving incentives to servicers, offering them $1,000 to carry out a modification and an additional $1,000 for each year that the homeowner stays in their home. This programme also appears to be having a limited effect, as foreclosure rates hit a new high in the second quarter of this year.
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.
The other effect of a right-to-rent rule would be that it would give lenders substantially more incentive to modify a mortgage. Under the rule, the lender could still carry through with the foreclosure process and take possession of the house. The lender would also be free to resell the property, but the former homeowner would still have the option to remain as a tenant, paying the market rent for the period specified in the law.
Since a house that comes with a renter attached is much less valuable to the bank, foreclosure would be a much less attractive option. Therefore lenders would have more incentive to try to work out a modification plan that allowed the homeowner to remain in their house as an owner.
The main argument that has been raised against a right-to-rent law is that it would interfere with the sanctity of contracts by changing the terms of enforcement after the fact. While it is important to have clear law on such issues, there is precedent for such changes. During the Great Depression the government imposed a complete moratorium on foreclosures, a move that was upheld by the courts.
Perhaps an even better precedent was the bankruptcy reform act that Congress passed in 2005. This act made it far more difficult for creditors to have their debts relieved in bankruptcy. The reason that this provides a precedent for right-to-rent laws is that it was applied retroactively to debts already incurred. A person could have run up $30,000 in credit card debt under one set of bankruptcy rules only to find that they were now bound by a much stricter new set of rules. When the topic was changing the rules to benefit creditors, the sanctity of contracts was never even raised as an issue.
The foreclosure crisis is a disaster for millions of homeowners who are seeing dreams ruined and their families' lives disrupted. The efforts to develop creative mortgage modification schemes have thus far not been successful in providing much relief. Such plans are inevitably costly and time consuming.
By contrast, a right-to-rent law can instantly provide security to millions of homeowners facing foreclosure. It requires no bureaucracy and no taxpayer dollars. Perhaps the Obama administration and Congress will take such a proposal seriously now that they have tried everything else.
© 2009 Guardian News and Media Limited