The concept of "right to rent" has been floating around Washington for almost four years. Under this proposal, foreclosed homeowners would be allowed to remain in their house as renters paying the market rent, for a substantial period of time (e.g. five years) following a foreclosure. While several bills have been introduced in Congress, President Obama may now have a new opportunity to take the lead on this issue.
The overwhelming majority of mortgages that have been issued since the financial meltdown in September of 2008 have been bought by Fannie Mae and Freddie Mac or insured by the Federal Housing Authority. This has led to an interesting, but predictable, outcome. The most recent data indicate that more than half of the new foreclosures are on houses where Fannie and Freddie either hold the mortgage or have insured the mortgage-backed security in which it sits.
Rather than being a problem for banks to deal with, the problem of foreclosures is now primarily a government problem, since the Federal government now owns and controls Fannie and Freddie. This means that President Obama no longer has to beg the banks to allow people to stay in their homes. He can do it himself. And, he can show the banks how to do it right.
The main objection the banks continually raised when they were urged to make modifications rather than foreclose, was the one of moral hazard. If homeowners know that they can get both a lower interest rate and a big principle write-down by missing a few mortgage payments and pleading poverty, then you are giving them an enormous incentive to go this route. Millions of homeowners who are able to pay their mortgage will instead opt for modifications.
The banks did have a point on the policy side. While some of the mortgage debt was held by banks, mortgage-backed securities are held by a wide range of investors including pension funds, mutual funds with 401(k) investments, and university endowments. It's not obviously good to make these investors take a hit. And even with the banks, if their losses lead to more bailouts it's the taxpayers who take the hit.
And not all homeowners are struggling moderate-income families who got deceptive loans. Most homeowners are middle-income families who got prime loans.
The politics look even worse. The Tea Party got started by a televised rant over paying "your neighbor's mortgage." It proved easy for the right to exploit this image of a gold-plated government handout, even though the actual Obama program was nothing of the sort.
It is in this context that right to rent is largely bullet proof. It is no great handout. People will lose ownership of their home. But it will provide them with housing security for a substantial period of time. And it does it in a way that requires no taxpayer money and no new bureaucracy.
As part of the foreclosure process, homeowners would be offered the opportunity to stay in their home paying the market rent, as determined by an independent appraiser. This is the same sort of appraisal process that banks use when considering a mortgage application. It can also be structured to ensure that millionaires are not gaming the system. The limits can be set so that the option only extends to homes that cost less than the median price or less than 1.5 times the median price in a metropolitan area.
This won't help everyone. Those who have lost their jobs and have no regular income or savings will find even the market rent unaffordable. However in many former bubble markets the market rent is less than half the mortgage that people who bought near the peak of the bubble would be paying. The switch to renting would make the home affordable and free up money to be spent on other items, boosting the economy. Of course the whole neighborhood gains if the house remains occupied rather than being boarded up as a foreclosure.
It would take a law passed by Congress to create a right to rent for the people losing their home to foreclosure. However, President Obama could unilaterally act to require Fannie and Freddie to go this route.
Fannie and Freddie already have very limited programs along the right to rent model in place, but they are cumbersome in their mechanics and have only been offered to a small number of homeowners. President Obama could tell these government-owned mortgage giants to start offering a rental option to all their foreclosed homeowners.
The government already loses more than 50 percent of the loan value on an average foreclosure, so there is very little potential loss by allowing the rental option. And, if it keeps people in their homes and shores up neighborhoods, there will be a very large gain. And, it will provide a good model for the banks.
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John R. Talbott: How Obama Can Fix the Housing Market and the Economy
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The right to rent cuts through the headache of having to take on additional expenses to reoccupy the home and allows the current occupant to have an option.
This is a case by case situation and the right to rent may be subjected to some guideline for the sake of protecting banks and their institutions.
Sadly, he is no Roosevelt or Truman, but too much of a self-serving politician.
I think he should be made to sit in front of a TV and watch the June 26th 60 Minutes segment on homelessness, hunger, and poverty as it affects our children. Then he might discover why we're having a harder time believing him when he runs around the country saying, "Things are getting better." For who? That's just not what people are experiencing. It's time to stop talking and act. Do something vigorous and bold (?!). And if it gets shot down, he needs to shout about it. We'll know who to blame.
What happens if the Heating/AC goes out? Do you really think your lender will replace it? After all, they are already carrying you with rent which may be far less than the mortgage interest they were previously collecting.
Lenders have absolutely no economically sensible reason, other than legal compulsion which amounts to an involuntary taking, to allow a foreclosed homeowner to rent back the property. Especially when the former homeowner has no possibility of regaining ownership of it. How many of these new renters will trash the house out of spite and just disappear in the night?
In December 2009 Timmy Geithner ruled that Fannie and Freddy could purchase these securities on the open market. This was not a move to help distressed homeowners but a backdoor bank bailout. The true value of the securities sold off after the Lehman collapse was 8 cents on the dollar. These are also the same sort of securities purchased by the Fed in their first quantitative easing program. If the Fed and now the Treasury paid full price there is a distinct possibility that the Wall Street looters have made off with several trillion taxpayer dollars. This is perhaps why the Fed is resisting all efforts for an audit.
1) The bankers started off by artificially inflating appraised values (Fraud 1) and lowered lending standards to generate as much business and money for themsleves as possible...then
2) Knowing all along that the homeowners would eventually default on these shoddy loans and false appraisal amounts, they packaged these securities as top class type investments and sold them off as such to investors (Fraud 2)
3) Then these investments were hacked up into different trusts etc...without proper documentation to preserve the chain of title during these transactions (Fraud 3)
4) Then, when the homeowner ended up defaulting for whatever reason, the banks, knowing they did not have proper documentation for chain of title, put the foreclosure process (with more improper paperwork) on the fast track, hoping they would not be caught, and tried to sweep as many of these under the rug as possible, (Fraud 4 & 5)
Since the homowner surely was not qualified "based on the artifically infated appraised amount", may now be qualified based on the current value of the property.
The banks should eat the difference via principal reductions....since this whole mortgage mess was "originated" by them.
The bank exectives and other high level people should be forced to rent.....not the homeowner who not privey on what was being conjured up behind the closed doors of these white collar criminals.
I think that this program would be extremely fair, and probably the best idea I've heard yet. It is still problematic that it would keep the homes off the market, but the banks are holding on to a huge inventory of unsold homes as it is. Allowing the former owners to become renters is the best outcome in that it would provide stability for many and avoid the problem of the banks foreclosing and then allowing the properties to sit and rot.
In cases where they were not "initially qualified", yes, renting the property would be a sound solution.
However, every case is not the same, and those of us who have been harmed through no fault of our own, should be made whole.
One day during his Presidency GWB stepped out of the White House and announced he was "ordering Fannie and Freddie to guarantee loans to low income Americans so they could live the American dream" .
All of us know that is something Fannie and Freddie , the VA , and the FHA were all created to do , just that , and had been doing it well for many years , until his announcement . Very wealthy people do not need government backed loans .
After his announcement the wheels came off the housing market and once again a Bush was involved in diddling with government backed loans at a huge cost to the American tax payers .
The late 1980's S&L larcenous acts were committed by a gang , having to do with government guaranteed loans , that included a Bush with a well known US Senator trying to prevent the prosecution of the perpetrators .
President GHWB signed a S&L bail out law (up until that time the largest in history) to cover the loss of tax payer money with tax payer money . Thousands of senior Americans lost their life savings in that fiasco .