Obama's Foreclosure Plan Du Jour: Own-to-Rent

Just when you thought the Obama administration was out of crazy ideas to solve the housing crisis they come up with another one. This one is cleverly labeled by Clusterstock as Own-to-Rent.

As Reuters reports, the idea is to let owners facing eviction stay in their homes as renters:

Under one idea being discussed, delinquent homeowners would surrender ownership of their homes but would continue to live in the property for several years, the sources told Reuters.

Officials are also considering whether the government should make mortgage payments on behalf of borrowers who cannot keep up with their home loans, tapping an unused portion of a $50 billion housing aid kitty.

As part of this plan, jobless borrowers might receive a housing stipend along with regular unemployment benefits, the sources said.

Let’s take a look at everything that’s wrong with this.

First off, I suspect that more than a few of the investors that own these mortgages might not be thrilled to see their contractual rights to foreclose on the property and dispose of it are going to be real happy to learn they’ve just been turned into long term investors in real property. They probably just want to get whatever is left over from a bad investment and lick their wounds for awhile. Instead, the government is going to make them stay in the game.

Next, who is going to manage all of this property. The banks and loan servicing companies are set up to deal with paper not houses. By all accounts they have been swamped just trying to repossess and dispose of the properties. Lord knows how they’ll cope with several million tenants calling about stopped up toilets let alone collecting the rents.

What laws are going to govern these rental arrangements. Each state has its own landlord-tenant statutes and they tend to be relatively complex though definitely not uniform from state to state. There is no comparable federal set of statutes. I suppose you could say facilely that the laws of the state in which the property is sited will prevail but that will get carved up in short order by the lawyers. The press will be shouting where’s the fairness as soon as they realize that an evicted family in Phoenix is on the streets in twenty days while it takes three months in Los Angeles.

Naturally, this is going to do nothing so much as freeze the housing market. Presumably, these sweetheart leases have some maturity which will represent a natural overhang on the market. Rather than clearing the market and getting foreclosed homes through the banks and back into private hands, buyers are going to have to factor in millions of homes that will at some point come flooding back into the resale pool.

Finally, how about some help for renters. Why is the guy or gal that had the good sense to stay out of the housing market when it was bubbling and loses his or her job being discriminated against. They need some place to live as well and if they find themselves in financial difficulty are certainly no less deserving of the same help that is extended to a former homeowner.

The whole idea is one of those feel good attempts at policy that slosh around Washington these days. The problem is that there’s always the possibility that it goes somewhere before anyone sits down and analyzes the potential defects or that Congress gets it in their teeth and disregards any defects.

Comments

[John Galt:]

Your article makes too much sense...

It used to be that if you wanted something you worked hard and earned it. Now, if you earned something your neighbor is entitled to have it too ( you are just lucky, they are unlucky, you came from money and probably don't deserve it anyway).The land of opportunity turned into the land of entitlements... indeed.

Jul 15 09:38 AM

[Gravity404:]

Great Idea!
We will need oversight.
Who would make a good "Own-to-Rent" Czar?
Who was Al Franken old nemisis on the SNL skits?
We can tax small businesses and the rich to pay for it.

Jul 15 09:47 AM

[Economic Di...:]

My take on this program is that it would allow the banks to have real world level III accounting control over the property market. Prices would then be gamed (through banks collaboration) to the much higher side if banks are in control of the future appreciation. This program had better not ever see the light of day.

Jul 15 10:10 AM

[walter315:]

We should be careful to dismiss this idea. It may be the greatest thought to come from the administration. Finally, we have a potential solution to the problem that recognizes that this is, at the end of the day, a loan problem and not a security market problem. Geithner has always taken the view that this is a security market problem, hence the need for TALF, TARP etc. The loan modification idea is stupid. In any mortgage pool one is going to find very few modification candidates. A mod candidate is someone who wants to stay in his home and needs temporary (one to two year max) help. That isn't they type of person who is currently delinquent. Finally, we have an idea to handle the problem that doesn't involve borrowing money. Hopefully, it will preserve property rights and preserving property rights would mean that the government must by (not necessarily at par) these bad loans from the pools and then deal with them in a way that supports public interest in the local real estate markets. The upside to mortgage holders are lower severities (but severities none the less). The upside to tax payers is preventing foreclosed homes from hitting the real estate market at one time. As far as who manages this, the government will have to work with local authorities who will have to manage it locally. However a plan the removes title to defaulting homeowners but gives them some hope that they can again own the home at some point down the road is a good idea.

Jul 15 11:13 AM

[Accuriz:]

Excellent point, but take it one more step.

If someone can pay rent, that rent can be considered part of a mortgage payment. The government is providing $8,000 for first time buyers, so why can’t the government pay part of the payment and have the borrower repay the government in the future. Here is an example of how it could work.

Mr. and Mrs. ZZZZZ have a mortgage payment of $1,170 ($200,000 loan with 30 year payout at 5.75% interest). The ZZZZ’s lose their job and can only pay $470, so the government pays the difference of $700 so the ZZZZ’s remain homeowners and work through their problem. It takes the ZZZZ’s 10 months to get back on their feet, the government paid out $7,000 and now the ZZZZ’s owe the government. But the government says, okay you can start paying us back in seven years and the payment will be over 10 years at an interest rate of 3%.

What the government has done is provide assistance to the property owner (just like the bailout plans for the Financial Industry and Automotive Industry) and requires them to pay back the obligation starting in seven years. This is not a freebie, but short term assistance. Franklin Roosevelt called it Lend Lease.

This program is not perfect, it can assist a lot of people who want to own homes and most importantly it is channeled directly to the property owner, not a large corporation that has motives other than keeping the property owner solvent. A significant benefit of this program is that payments to financial institutions will resume and cash flow will get back to normal levels, thus credit availability should improve.

There need to be conditions, such as confirming gross income via income tax statements, confirming employment and confirming current payroll. The only group of individuals who would be excluded are those who own more than one property (there should be no break to the investor who treated real estate as a business) and cases where mortgage fraud exists in the form of straw buyers and invalid sales (properties that sold more than three times within five years and the value change was greater than 150%)

The total assistance would be capped at $50,000 and could run for 24 to 36 months. So in a given year up to $25,000 could be provided. The government would be releasing the funds over 12 months, this the federal outlay would be limited. The total cost of 10 million loans receive assistance would be $250 Billion per year or $500 billion in total. This is much cheaper than the TARP bailout and part of this can be funded with the current $70 billion in TARP repayments.

The greatest difficulty in implementing this program is processing and accounting. Loan Servicing companies would need to add staff (if one servicer can process 50 applications a week, 4,000 servicers would need to be hired, plus additional support staff) Wow, as many as 10,000 new jobs would be created. Add to this job creation the fact that several million homes do not go into foreclosure and more jobs are not lost to desperate situations.

Yes it is possible and yes it can work.

The reason it can work is because real estate goes through cycles. If people are forced to sell at liquidation prices everyone loses. Give property owners a chance to get back on their feet, get back to work and the whole economy starts to turn around.

As stated early, this is not perfect and many will complain about the injustice. But think about the injustice of the corporate bailouts, the injustice that first time home buyers get a break, the injustice that shareholders come before the individuals who created value in the companies by buying products. One can go on and on, or we can try. We only fail if we do not try.

Jul 15 01:10 PM

[sethmcs:]

The problem with this idea is a useful valuation of real estate is one months rent time one hundred. If you live in a 200k house the rent should be 2k. If one of these "renters" could afford 2k a month then this program is not necessary. One the other hand if the gov't program determines the "fair rent" is $750 then the house is only worth 75k. Either way someone is going to take a big loss.

Jul 15 06:40 PM

[jal:]

Corrections: (An other point of view)
His first point … the investors are Fannie and Freddie.
His second point … nobody is going to be calling Freddie and Fannie to fix a toilet. Just make sure that they understand their “rent-to-own” contract.
His third point … there will not be a flooding of houses coming on the market. A “rent-to-own” contract can easily be written so that the “renter” gets first refusal or match a purchase offer.
There would not be a “sweet rent deal”. It would be at market value. Can’t pay that rent, then get out, rent something cheaper, because someone else can pay that rent.
The present rental market will not be destroyed. Prices are going down to meet the financial capabilities of the flood of would be renters to pay.

The alternative, doing nothing, means setting up a lot soup kitchens and shelters which will cost society and the gov. a lot more money.
jal

Jul 15 10:38 PM

[TLAWLER:]

Your point about "what about renters" is right on. Renters who lose their job and as a result can't afford their rent -- and as a result face eviction -- are getting no help from the government. Moreover, the demographic data on the unemployed suggest that renters have been hit harder than homeowners in terms of job losses/unemployment rate increases. The adminstration's whole approach to the housing mess has been a spit in the face to folks who rent homes.

Jul 16 12:04 AM

[Loan Survivor:]

Crazy idea. What next - can't afford my car payment so the government subsidizes that?

This is a sign that the government is a lot more worried about the housing market than they're letting on. Maybe all that shadow inventory is piling up and getting to be a problem.

Also, how much would it cost taxpayers when the government has to hire oodles of accountants, admins and executives to execute the program?

Jul 16 08:43 AM

[casey00001:]

Let's assume the same guy who has not been current on his payments is not also current on his home repairs. The day he becomes a renter he calls the building inspector and files a complaint. He still lives in the same house and all the delinquent repairs to bring the house to code get fixed for free (oh the taxpayer pays again)

Jul 16 08:45 AM

[Chancer:]

When the toilet stops up, they should call the White House, of course.

Obama will send over Rahm Emmanuel with a plunger.

If Rahm is busy, send Hillary or Biden.

Jul 16 01:44 PM

[jazzkeys:]

Where did you find something that suggests that renters have been harder hit by unemployment than homeowners? Not arguing, I just find that fascinating and I would love to view that data.

Thanks!


On Jul 16 12:04 AM TLAWLER wrote:

> Your point about "what about renters" is right on. Renters who lose
> their job and as a result can't afford their rent -- and as a result
> face eviction -- are getting no help from the government. Moreover,
> the demographic data on the unemployed suggest that renters have
> been hit harder than homeowners in terms of job losses/unemployment
> rate increases. The adminstration's whole approach to the housing
> mess has been a spit in the face to folks who rent homes.

Jul 16 03:22 PM