The Lease-Back Bailout

David Leonhardt's column today is about moral hazard in the world of homeowner bailouts: How can we help people who are genuinely having difficulty making their mortgage payments, without needlessly bailing out any old homeowner who'd simply like to pay less?

One of Leonhardt's proposed solution is the plan written about by Joe Nocera last weekend, under which banks would take over the ownership of underwater houses, and rent them back to their former owners at market rates. This is a great idea: Market rents are much lower than mortgage payments, so it's a savings to homeowners, who also get to stay in their houses. And it prioritizes affordable housing over homeownership, which is right and good.

There's nothing new about this plan: Dean Baker and Andrew Samwick came up with something almost identical way back in August 2007. It made sense then, and it makes sense now. I've been wondering for a while why it hasn't got any traction over the past year; maybe now that the likes of Leonhardt and Nocera are on the case, and investment bankers are pushing it rather than mere economists, and both presidential candidates are casting about for bright ideas to help solve the mortgage mess, it'll have a better chance.

Comments

[Jolly_Rancher:]

It's already happening but not in the simplistic way you describe. Banks are not in the real estate business. Their business is making loans. Banks are selling foreclosed property at big discounts to real estate companies who are in the business of renting property. Foreclosed homeowners are still evicted, but many are just moving down the street to a rental home at rental rate much lower than their mortgage payment.

2008 Oct 22 01:44 PM

[Smarty_Pants:]

Ummmm ......

1) This would put us right back in the "don't lose money for the taxpayer" arugment. Does the US buy those houses at the loan value or market value? How do homeowners/banks handle the losses in the latter case? How do the taxpayers handle the losses in the former case?

2) Just how exactly will Uncle Sam maintain the house when something important needs to be fixed? No-bid contracts? (Can you say "Waste, fraud, and abuse."?) I wasn't aware that Haliburton was in the property management business ... yet.

3) Who sets the rent? Security deposits? Who collects?

4) What about local government property tax revenues that suddenly shrink because all that 'new' federal property is exempt?

5) Let's not even attempt to discuss where the Trillions of dollars needed to buy the houses would come from in the first place.

Sure, I can see that plan working at break-even or better ... NOT.

Like most proposed government programs, lots of sizzle, very little steak.

2008 Oct 22 01:46 PM

[moonbat1775:]

I have an idea. The banks (and the Fed) created those loans from thin-air; how about repaying them with "thin-air"? I am debt-free so I have no stake in the matter other than seeing the screw ers get
screw eed.

2008 Oct 22 01:52 PM

[Jon Smirl:]

"How can we help people who are genuinely having difficulty making their mortgage payments, without needlessly bailing out any old homeowner who'd simply like to pay less?"

I'm having genuine trouble making payments on the $15M nothing down house I wish I had bought.

If you can't make your payments you bought more house than you can afford. You are better off in the long run losing it.

2008 Oct 22 02:42 PM

[sr9web:]

One solution to consider would be to give struggling/foreclosed, but otherwise solvent homeowners a new mortgage with lower fixed rate, a longer term and a ballon. If you redo for 40 yr fixed at 5%, with 1/3rd principal balllon, your current payment drops substantially. Certainly, at some point before 40 years, they'd be market conditions favorable enough to sell and pay the ballon. Also, the % rate on the ballon could be set artificially low via federal subsidy.

2008 Oct 23 02:05 AM

[Bruce Krasting:]

Should something like the following be considered??


A Proposal to Stimulate Housing Demand
(Discussion Draft)


In order to stimulate demand for housing the US offers to provide Permanent Residence Status to individuals and their direct family who acquire a home in the US and live in it for a period of not less than five years.

Applicants will be granted temporary (5year) status upon completion of the home purchase. The temporary status will provide them with a SS# and the legal status to apply for a drivers license in the State they choose to reside.

The minimum purchase price of the property to be acquired will vary by region. The average national price will be set at $250,000.

At the end of the five-year period the temporary status is automatically converted into permanent status provided:

-The applicant has continued to reside in the acquired home.
-The applicant has performed on all of the financial obligations related to financing the acquired property.
-The applicant has paid all relevant property and income taxes during the five-year term.

If they live their lives as do most Americans, then they are welcome.

Once converted into the permanent status the applicant may apply for full citizenship. If they do not become citizens they still get the right to obtain a US Passport. These passports will be similar to resident passports. They will have some distinction as to the status. The F (foreign) status concept is used in a number of European countries.

In today's world you must have a minimum of $50,000 in the bank to apply for this program. There are tens of millions of people currently outside the US who have this much capital and would love for their family to be protected by a US passport. In addition, there are millions of illegal aliens who live in the US today who have the minimum capital to apply.

The program could be limited to 50,000 applicants a month. The program could be terminated or reduced at anytime. The maximum could be set at 2MM. This means approximately 8mm new citizens. However I would estimate that at least half of the potential applicants are already living here. This would stimulate demand for 2mm properties. This would immediately stabilize home prices. The addition of 8mm new residents would act as its own stimulation on the domestic economy. We would benefit twice.

Bruce Krasting

2008 Oct 23 08:36 AM

[Jwacg:]

Well Bruce, As a Englishman living in Spain and wanting to live in America I would need to invest $500,000 in a full risk business for a minimum of 2 years even to be considered eligible to settle in America. My wife is a English / Maths teacher my two children are both strait A Students, we would be no drain on the system and willing to abide by the laws laid down.
I think it is a great Plan, bring it on and I will be the first in line.

2008 Oct 23 09:40 AM

[rm:]

[banks would take over the ownership of underwater houses, and rent them back to their former owners at market rates.]

Even back in the go-go days, sale and leasebacks to owners in foreclosure only worked out 10-20% of the time.

And that was when anyone with a pulse could get a mortgage.

i'm too busy to pencil this out, but even under extraordinary circumstances, you're probably looking at a 50% success rate.

Even with that pie-in-the-sky assumption, you've still got a huge mess on your hands.

Ever been in the property management business?

BTW, who's funding upkeep costs and repairs under this plan?

I suppose they can get their toilet seats from the Pentagon.

2008 Oct 23 10:48 AM

[REITBull:]

I would like to see "Foreclosure" REITs, either govt. or privately sponsored.

Shares of the REITs could be sold on the stock market to raise funds to buy distressed properties. The properties would be leased to provide a modest dividend to investors.

I am sure that I am not the first to come up with this idea but it might be worth further discussion. Not a silver bullet but it would stabilize values.

2008 Oct 24 09:04 AM