08/07/2009 01:00 pm ET Updated May 25, 2011

Righting The Housing Market

My colleague at the Drum Major Institute John Petro this week called on the federal government to pay attention to renters who are ignored by a federal housing policy that focuses on homeownership. He asks:

[W]hen a family can barely cover rent and keep food on the table, how are they meant to save enough money for a down payment for a home?

John points out that the Obama administration's lackluster mortgage-modification program perpetuates the very reliance on homeownership that helped create the housing bubble, the financial crisis, and the Great Recession.

Though efforts to help current renters are certainly necessary, Congress could demonstrate a concern for rental policy while also dealing with the persistent housing crisis. The Right-to-Rent program, a policy championed by CPER director Dean Baker, would permit homeowners who have been foreclosed on to remain in their homes as renters. The bank would take possession of the home and would be able to sell it, but the former homeowner would retain his or her right to remain in the home as a renter for a specified period of time. Because market rents are significantly lower than monthly mortgage payments in metropolitan areas, beleaguered homeowners - often recently unemployed or suffering from some other serious financial shock - would receive financial relief, while maintaining an incentive to keep their home in good repair, helping prevent their own and neighboring property values from falling.

The Right-to-Rent program succeeds where Obama's plan is currently failing. As James Surowiecki points out in The New Yorker, new research demonstrates that servicers are reluctant to modify mortgages because of the likelihood that delinquent borrowers will either self-cure (they will restart regular payments) or that they will redefault even after a modification. Both of these cases make foreclosure the less expensive option for lenders. But creating a right-to-rent would decrease the attractiveness of foreclosing since, as Baker argues, "a house that comes with a renter attached is much less valuable to the bank..." Thus, lenders would be more likely to modify mortgages and keep homeowners in their homes.

The proposal, which was passed in a very weak (and probably unhelpful) form by the House of Representatives several weeks ago, would not only help homeowners and stabilize the housing market. Importantly, the proposal is a pro-renter policy, one that recognizes the benefits of renting without undermining the (often overstated) benefits of homeownership. Right-to-rent recognizes that renting is an affordable alternative to home ownership that should, at the very least, not be discouraged by federal policy.