In the "Green Room" roundtable discussion that follows the taping of ABC's This Week, Arianna Huffington brought up the idea of Right to Rent. The basic plan is to allow homeowners to stay in their home for a substantial period of time (e.g. 5 years) following a foreclosure. During this time, they would pay the market rent as determined by an independent appraiser. This plan requires no government money and no big new bureaucracy. (More details of the proposal are available here.)
Right to Rent benefits not only the homeowner, but also the larger community. It prevents foreclosures from becoming eyesores and hazards for neighborhoods as abandoned properties go unmaintained and possibly become drug houses or havens for other criminal activities. By keeping the home occupied with a long-term tenant, Right to Rent should prevent the sort of deterioration that drives down both property values and the quality of life in a neighborhood. This is the sort of logic that recently led the plan to be adopted on a large scale by Ireland's government.
Ms. Huffington's roundtable partners, George Will and Niall Ferguson, quickly dismissed the proposal, both insisting that she was wrong to assume that it would be cheaper to rent than to pay the mortgage on their homes. Will and Ferguson need to review the data.
The people facing foreclosure mostly purchased their homes at bubble inflated prices in the years 2002-2007. In the most inflated markets, like Las Vegas or Phoenix, sales prices were 25 to 30 times annual rents at the peak of the bubble. If a house was purchased at 25 times its annual rent, then a 4 percent mortgage would just equal the annual rent. Of course most of the people who are underwater are likely paying considerably more than 4 percent on their mortgage. A 5 percent mortgage would put them 25 percent above the cost of renting, while a 6 percent mortgage would put them 50 percent above the cost of renting.
If we assume that property taxes are equal to roughly 1 percent of the sale price and that insurance and maintenance are another 1 percent, then monthly ownership costs can easily be twice as much as the market rent on the same house. Here are some calculations of the potential savings from Right to Rent in the nation's largest housing markets.
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The banks don't want to be in the rental business.
Would the Government manage these homes????
They should man up and restructure the loan which would require the owner of the loan take a charge off, require the borrower to clean up the liens, rewrite to a near market rate of interest forget about all the garbage regarding loan forbearance because there is no near term magic market bullet that's going to save them. They should ONLY modify the current loan to preserve the current lien position; anything else disturbs their rights. They could add an upside sale kicker to split profits at some percentage
The next bubble will create a whole new class of millionaires.
I know george will is right, but is he ever correct about anything?
The Constitution does not grant the government the power direct foreclosing banks to rent their property. The other Obama administration initiatives also kept running into the same problem that the government does not own and thus has no power to direct the use of these properties.
Banks do not have the ability to manage and maintain rental property. Banks will temporarily hire a management company only until the foreclosed property can be sold. Compelling banks to rent these properties long term would impose tens if not hundreds of billions of dollars of losses on the banks, which of course will be passed onto bank consumers.
Government compelled leases will destroy property market value because no investor in their right mind will buy government controlled homes. Because Sarbanes Oxely requires banks to report the market value of their assets, any bank with a substantial portfolio of foreclosed properties will become insolvent.
This plan creates fundamental moral hazards. Any rational borrower in an underwater mortgage will immediately foreclose to gain a far lower government set rent. The foreclosure crisis will be placed on steroids and all the losses noted above will multiply.
Finally, this direction of the economy will indeed require a large government bureaucracy to manage. Who sets the terms of these government imposed leases? The lease duration? Rent increases? Landlord and tenant duties?
(gee, kinda of sound like George Will)
If the banks making the loans, had been holding the mortgages, and servicing them, it is pretty likely underwriting standards would have been a bit better, and the risks of default reduced. Canada didn't have the real-estate problems of the US and the UK for exactly that reason.
Secondly, the practice of buying mortgage backed securities (a long term investment) with short term paper, may seem like a profitable enterprise for a few quarters, but at some point short term borrowing costs rise, and the whole enterprise collapses.
http://www.doctorhousingbubble.com/day-of-reckoning-shadow-inventory-distressed-properties-40-percent-of-properties-in-foreclosure/
Here in Calif, I've noticed a significant shift in the proportions of distressed properties on the MLS from foreclosures to short sales within the last six or eight months,
He said to allow the prior occupant to continue to RENT post-forclosure. Nothing about not foreclosing. Nothing about letting a delinquent home owner keep the house.
Just, rent it post-foreclosure back to the family AT MARKET RATES until it sells.
Cruel indifference towards poverty and the plight of the middle class doesn't surprise me, coming from conservatives on the right who also find absurdity and snort in contempt at the concept of profoundly rich corporations paying their American workers at the least a minimum or 'living wage.'
After all, they muse, there's no reason to assume people can't make it or won't be content working for far less.