Right to Rent: Helping Homeowners Without Throwing Money at Banks
We got into the current economic crisis because many very smart people with outstanding credentials were unable to use simple arithmetic. If they knew arithmetic, they would have been able to see an $8 trillion housing bubble that was right in front of their faces.
The basic story was incredibly simple and obvious, at least as far back as 2002. After just following the overall rate of inflation for the hundred years from 1895 to 1995, house prices began to hugely outpace the rate of inflation in the mid-90s. Not coincidentally, this run-up in house prices paralleled the run-up in stock prices.
As was the case with Japan, the United States had a stock bubble and real estate bubble growing side by side. Unlike Japan, where the two bubbles crashed simultaneously, the crash of the stock bubble fed the growth of the real estate bubble in the United States. By 2002, nationwide house prices had increased by almost 30 percent above their trend levels. By their peak in 2006, they had increased by almost 80 percent above their trend level, creating more than $8 trillion in housing bubble wealth.
The inability of economists and the financial industry to see this enormous bubble was the basis for the current crisis. Remarkably, most discussions of housing policy still ignore the bubble.
It is often argued that we need to stabilize house prices. In many markets this is a desirable goal. However, in many markets in California, Florida, and the Northeast, where the bubble has not yet fully deflated, it would be counter-productive to try to sustain house prices at bubble-inflated levels.
Prices in these markets will eventually fall to their trend levels; the only question is how fast. Unfortunately, many of the same policy wizards who wanted low and moderate-income families to buy homes at bubble-inflated prices in the years from 2002-2007, would still want them to buy houses at bubble-inflated prices today. They somehow think that the best way to accumulate wealth is to own a home that is falling in value.
Even worse, they want to use lots of taxpayer dollars to keep people in homes in which they have no equity. Representative Barney Frank is one of the key villains in this story. His top priority is to use the TARP money to pay banks for their bad mortgages, so that people can stay in homes with no equity.
This one is really baffling as economic or social policy. Should we pay a bank $20,000 in order to keep a homeowner in a home in which they have zero equity? How about $30,000? How about $50,000?
It costs a bit more than $3,000 a year to pay for a kid's health care under the State Children's Health Insurance Program. We can all understand the benefit of health care for kids. Is it worth 17 kid-years of health care to keep someone in a home in which they have no equity?
There is a simple no cost, no bureaucracy alternative to Frank's plan to hand tens of billions to banks. (Remember, the banks get the checks under Frank's plan, not the homeowners.) We can simply temporarily change the rules on foreclosure to give people facing foreclosure the right to rent their homes at the market rent.
This is extremely simple and can go into effect the day after Congress passes the rule change. Judges or the court officers handling a foreclosure would be required to ask the homeowner whether they want to stay in their house as a renter. If they say yes, there would be an appraisal of the market rent of the home, and the homeowner would then have the option to stay in the house for a substantial period of time (e.g. 10 years), paying the market rent.
This would immediately give the homeowners facing foreclosure security in their housing. If they like the house, the neighborhood, the schools for their kids, they would have the right to stay there. It would also end the problem for neighborhoods of empty foreclosed houses. And, it would give banks real incentive to negotiate terms that allow people to stay in their homes as owners.
This proposal is very simple and costless. It is also possible to build onto this proposal with mechanisms that facilitate the transition to renters or allow buyback options as Bernard Wasow of the Century Foundation and Daniel Alpert from Westwood Capital have proposed.
But, the key point here is that it is simple to find a way to help homeowners that doesn't help banks, if we are prepared to give the issue a bit of original thought. Fear of original thought among our top policy experts was the problem that got us into this enormous mess. We should not let the same group of failed experts perpetuate the damage that they caused by their fear of thinking.
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I think it’s a safe bet that all the people in favor of bailing out homeowners are homeowners.
The whole economy has been in part propped up by the housing bubble. People used the equity in their homes to obtain lines of credit to refurbish and upgrade their homes, thinking that they were adding value to the property. Now they are underwater with no equity and no chance to refinance the loan to a fixed rated and away from an adjustable rate mortgage. The opportunity for a property owner to restructure the principal of the loan to 90% of appraised value seemed to me to be a good one with the FHA getting back at least 50% of the profit at point of sale. There were some problems with some taxes attached, but it was workable, but the lenders and investors in the bundled mortgages are dragging their feet on the Hope for Homeowners initiative. A fully amorotized loan over the 30 year life of the loan gives the lender a substanial profit in the first place. Greedly lenders who then resold these loans really should not be calling the shots, nor should the investors who risked their capital. But if it remains politics as usual, it will be the unrepresented homeowner who is out in the street as the banking lobby works the corridors of Congress to protect their billionaire clients. We shall soon see.
For me it all comes down to this quote that shows just how out of it Rep. Barney Frank is:
At the beginning of this crisis Rep. Frank was quoted on 9/23 in the Wall Street Journal as saying:
“I just think it’s inconceivable that people would say that the taxpayers should put some money at risk because of bad decisions made by people who then continue to be rewarded without any restrictions and, in fact, would be rewarded for their mistakes,”
Granted here he was talking about financial executives but doesn’t the logic hold for homeowners? Why are they any different than a financial manager who made a bad decision?
But hey today he wanted to remove requirements that the UAW (as part of the GM bailout) have to meet wage parity with their foreign car companies building cars in the US so clearly fiscal intelligence is not a quality of his.
Who pays for the maintance and upkeep of the house and yards? Renters are not liable for such
and it is the owners of the house who are responsible for all such. A leaking hot water heater which needs to be replaced. Who does the renter call?
Such a plan will not work as it does not give the renter enough insentive as only ownership can give.
The owner would love it and care for it as the renter is just waiting to move to another place. The owner has the right to live there for the duration and would care for it as only an owner can.
It looks to me like the investment banking industry has, apparently unbeknownst to itself, acted upon the forces of the free-market and in doing so has transformed its business model into that of "Lord of the Manor". As such, Dean Baker's suggestion may be the best short-term solution, so long as all of those financial advisors who formerly had jobs now become trained and re-hired as property managers responsible for looking after their industry's assets (i.e., take off the suits, sport the overalls, and get to work fixing that toilet). Send them all to the school of hard-knocks, where they'll TRULY learn how to look after investments. In addition, all the former "homeowners" must agree to now be summoned by the title "serf".
But seriously, it's inevitable that home prices are going to continue to drop until the market stabilizes. Baker's suggestion could slow the speed of the decline, and absorb some of the shock to the economy until confidence is restored. This seems a better solution to throwing good money after bad and rewarding incompetence and greed. I mean, I'm trying to raise children here! I don't want to be lying to them when I teach them the value: "hard work and honesty pays off". But if I teach them what our society, our government, values in reality, I'm afraid child protective services would take them from me!
If we bought the house we rent at market, principle/interest + property taxes would exceed our monthly rent by about 10%. We'd spend a lot more catching up all the deferred maintenance. In a grim home and job market, that would be a gift to our landlord, but not to us.
You can offer bailout refi to a homedebtor, but many of these folks are thinking now about the value of being mobile and unencumbered in a crap economy.
So yes, I think rentback to the foreclosed owner makes reasonable sense. Not to any owners I know, but they don't like the notion of an abandoned house next door, either. Rock, meet hard place.
The market has to find it's own floor, unless you believe in subsidized and artificial market supports, forever. The housing market began to float free of it's historical relationship to incomes about a decade ago, and there's no kindly, gentle way to return to Normal Free Market. We all admit that pain is inevitable for recovery, but we aren't quite to the point of accepting that it's going to be *real* and not just "the other guy".
(Note to renters in this market: beware the involuntary amateur landlord. Many tenants get kicked with little notice to the curb, under the laws of most states, if the landlord defaults and is foreclosed. A word to the wise where lease-purchase is concerned as well - you won't be enforcing that contract if the house forecloses
This post is a great idea. I just wish there was a common sense lobby that I could support to push this through.
How about just letting people fullfill the terms of the contracts they sign?
Not good because the people were misled into signing the contracts in the first place. If the answer was as simple as "people shouldn't be deadbeats". do you think there would have been a 700 billion bailout in the first place?
When I spend $200,000 I have plenty of knowledge of what I'm doing and if I don't, I talk to someone who does if you can't afford a consultant than you can't afford a house. these contracts weren't done 10 minutes before the real estate office was closing and people didn't have to sign if they weren't sure. This pity party disgusts me. people are responsible for their own actions and these bailouts have shown that it's not your fault if you default on your bills.
not all this is bad.......
I love it.. Something else banks did during the depression
We are selling a house, and planned to do it as a lease-to-purchase. In other words, a person who didn't qualify to purchase RIGHT NOW would sign a contract - a call option if you will - that would give them the opportunity to purchase the house at a set price for the duration of the lease contract. Meanwhile, they would live there and pay rent. Each month we would apply $100 of their rent toward the purchase of the home.
At the end of the lease term they could walk away and lose the money they invested, or purchase the home (if they now qualified), or renegotiate the price of the home based on current value (not to go up or down more than 5% of the original price) and re-up for a new lease. That $100 per month investment would carry over into the new lease.
If it took them 5 years to qualify, so be it. We would have renters who were invested in the property, would take "ownership" care of it for us while they lived there, and would not bolt in the night leaving us paying two mortgages.
Perfect for everyone, no? Especially in this economy? Right?
My realtor told me that they made it illegal three years ago for a realtor to write that sort of contract. They used to be able to, but now you have to pay $5000 to a lawyer. They need to repeal that law.
namedujour, What state are you in? I'm a realtor in Florida and have written several contracts as you describe. I've had no problems with them--yet.
We tried this lease purchase arrangement and had to give our tenants of 14 months a 30 day notice to vacate as the male tenant stopped chipping in for rent and our female tenant gave us a rubber check for December. Not a cent for January and nothing towards December.
Hopefully this will work out better for us next time around..
Dean,
While you're right about the $8 TRILLION blinders of the bankers, I think you need a lesson in math also.
First, explain to me MATHEMATICALLY, how a debt-money system can EVER work.
ALL MONEY is initially created as a debt, repayable with interest to whoever created it.
Next ALL money to repay THAT debt is created as a debt, repayable with interest.
The money to repay the interest on the first debt in never created at all.
NEVER created at all.
Yet, it is payable on demand.
Now, when I say NOT created at all, I mean it.
ALL new money is created exclusively via securing some new asset or productive facility.
Did you or any of the progressie economists ever hear of anyone creating new money for the purpose of making an interest payment?
Bottom line.
We finally have a truly advanced monetary thinker in Congressman Dennis Kucinich.
See his speech on the Stimulus last week.
http://www
It's time for progressives to recognize the MATHEMATICAL and social failure of the nation's debt-money system.
Visit monetary.o
Tell YOUR Congessman to get behind Dennis Kucinich's plan.
Thank you Dennis Kucinich.
Thank you Dean baker.
Bravo!
I have been reading Zarlenga's book, and also his proposed legislation, which is what Kucinich is advocating. Federalizing the Fed and growing the economy by issuing Greenbacks is just, whereas the present money and banking system system unjustly induces inequality. But even more important, what they propose is sustainable, while the present system is unsustainable.
I have searched in vain for a refutation of Zarlenga's and Ellen Brown's argument that the present meltdown is nothing less than the inevitable collapse of fractional reserve banking, which is unsustainable because it requires ever increasing levels of debt, a mathematical impossibility. When no new creditable borrowers can be found, and banks begin to fail, as now, it may have hit the wall, as it must eventually do.
It is mysterious why this thesis has not drawn more comment---from economists like Dean Baker, for example.
Mr. Baker, I appreciate all attempts to find a solution to this mess, but I am trying to understand how your idea to let home owners turn into renters...
Maybe the rest of the country is different then the area I live in, but where I live renting a house does not cost less per month then paying a mortgage, in fact in many cases it cost more. If a home owner could afford to pay "market rent" certainly he could also continue to pay the mortgage payment .....
Usually "rent" is set to cover what is the "mortgage payment" ....and much of the time, plus additional $$ to either make some profit or to cover future repairs.
Real Estate Appraisers consider three factors to determine the "Market Value" of Real Estate properties. 1.Recent sale prices of other comparable houses in the area, 2. what it would cost to build the house per square foot at present prices of materials etc...and 3. The areas RENTAL PRICES.
In addition, "devaluation of houses "Market Value" is a real problem now. We all know that rarely do those who rent property take care of the rental property..
Who is going to manage all these rentals? Who is the renter going to call if her plumbing backs up or her roof leaks? And what effect is this new class of renters going to have on current renters and current landlords? Lots of unanswered questions here. Maybe it's a good solution, but I doubt if it is as simple and cost-free as this writer supposes.
The banks are not the problem. Government with the Federal Reserve are.
So we have the banks paid for the default and government picks them up and rents them out. In my neighborhood that is usually is the same as buying or slightly more.
They could not afford the payments and now they still can not afford the payments and government now owns them. Darn I forgot taxpayers will pay the difference.
With the Federal Reserve printed money that got us into this mess. Because it robs citizens for government politicians of which most Americans are not familar with. Welcome to the taxation of the Federal Reserve that is worst then your pay check deduction.
Sorry, I have to disagree with your first sentence. The banks are most DEFINITELY part of the problem.
Government with the federal reserve.
That's a new concept.
The federal reserve is the private banker's money-issuing and controlling system.
The Treasury is the government.
The private federal reserve bankers have created $TRILLIONS of dollars in new debts, a contingent liability on U.S. taxpayers, without asking anybody in government's permission.
The Treasury needs to go to Congress to get legislation passed to put $700 billion out there.
Yes, the federal reserve DID print the money that got us into this mess.
But, they are NOT the government.
They are a private banking cartel with the privilege of creating the nation's money.
The solution is to take away that privilege.
Renting is a half-baked idea.
When the plumbing goes wrong or the roof leaks or the snow needs removal or the lawn needs to be cut or the toilet needs to be un-stuffed who's going to do that? The bank? Don't the banks have enough to do in regard to banking without getting into the responsibility of being a landlord?
Letting people own their own homes for an affordable monthly sum is the better solution, as per my suggestion below.
So, let me see if I got this right. The banks, who allowed people to borrow homes they couldn't afford and then packaged these loans and passed them off to others (falsely labeled triple-A, of course, by Moody’s and its two principal competitors, Standard & Poor’s and Fitch . . . who ALSO made a sh@# load of money in the process) thereby allowing the bank to make money NOW instead of waiting over the course of the 30 year loan. These same said banks will be left owning the over priced house but forced to allow the owner continue to live there at renter's rates.
WOW! I LOVE it.
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