How to Turn Good Renters Into Bad Homeowners

by: Mark J. Perry

Much of the current credit crisis can be blamed on the fact that U.S. public policy (and monetary policy) encouraged excessive homeownership (tax deductibility of mortgage interest, government creation of GSEs, forcing the GSEs to promote subprime mortgages, enacting the CRA, historic low mortgage rates in 2003, etc.), and in the process we turned "good renters into bad homeowners."

Here's an idea about how good renters becomes bad homeowners.

Wouldn't it be the case that greater financial discipline is typically imposed on a renter than a homeowner? And isn't it typically the case that financially irresponsible behavior might be tolerated to a greater extent, and for a longer period, by a mortgage company than by a landlord?

For example, consider a renter living paycheck-to-paycheck, with weak credit, and monthly rent of $800. Faced with the threat of eviction within a few months of non-payment of the rent, most renters would make the rent payment a fairly high priority to avoid eviction. Also, the renter would typically be dealing directly and personally with either the landlord or a property manager, someone they would probably know by name.

Now if that tenant becomes a howeowner, possibly because of the availability of subprime lending and the CRA, several things happen. First, the renter-turned-homeowner is now making monthly mortgage payments by mail to a bank or mortgage company, often in another part of the country, and is no longer dealing directly with a landlord or property manager. Second, the the homeowner no longer faces the threat of almost immediate eviction (or within a few months, depending on the state) for non-payment of the mortgage.

According to this foreclosure timeline from, foreclosure and sale of a property can take up to 415 days (more than 13 months) after a mortgage payment is late (depending on state law), and it might take even longer for the eviction process. Knowing that non-payment of the monthly mortgage to a faceless company in another state won't result in eviction for possibly a year or more, wouldn't the new homeowner act much more irresponsibly as a homeowner than as a tenant?

That is, wouldn't the significantly greater default-foreclosure-eviction time frame for homeowners compared to tenants encourage more reckless behavior, and turn a good tenant making regular monthly rent payments into a bad homeowner, with delinquent monthly mortgage payments? And even if the "bad homeowner" doesn't completely default completely, late mortgage payments might be tolerated more by the mortgage company than late rent payments would be tolerated by the landlord.