Before We Sneak In a Bank Bailout Under the Guise of Helping Homeowners
There is great eagerness these days to craft some sort of bailout for homeowners facing foreclosure. Most of plans involve the government buying up or guaranteeing mortgage debt in situations in which homeowners face foreclosure. However tempting it might be to rush to do something to help homeowners in trouble, can we trouble our crusaders to do a little arithmetic first.
Those who have mastered this arcane craft, which used to be taught in the third grade, know that this bailout will do much more to help bankers who made bad investments than it will to help homeowners.
Okay, here’s the secret – we have a housing bubble. Let’s say that again, we have a housing bubble. That means that house prices are out of line with the fundamentals in the housing market. In many areas houses are still selling for prices that are twenty or even twenty five times what it would cost to rent a comparable house.
What does this have to do with the bailout plans? The fact that house prices are hugely inflated (although they are coming back to earth quickly in most areas), means that many of the homeowners we “help” with this bailout will pay far more in housing costs than if they were renting, and they will never accumulate any equity in their home.
Let’s take a quick example to see the point. According to data from the Census Bureau's American Community Survey, in Los Angeles, the median home sold for $585,000 in 2006. By contrast the survey showed that the median rent was $1,006 per month.
To make a comparison, let’s assume that a home that sells for 75 percent of the median house price, or $440,000 is comparable to the median rental unit. If we assume that the homeowner gets a 30-year fixed rate mortgage, then they will pay $2,750 a month on their mortgage. If we assume property taxes are equal to 1 percent of the home’s value and that maintenance and insurance are another 1 percent, then our moderate income homeowner will have to pay $3,480 per month for their home.
This is more than three times as much as they would have to pay to rent a comparable unit. Even if we assume that the price is shaved by 30 percent as a result of the decline in house prices to date and the wonders of our bailout program, the monthly cost would still be $2,440, more than twice as much as the cost of renting a comparable unit. The excess housing costs would come to more than $17,000 a year. What a great way to help moderate income families!
Oh, but I forgot about the equity. Well, since house prices are declining, and unless the government imposes bans on new construction prices will continue to decline, our homeowner will still be underwater by about $120,000 in four years, the typical period of ownership tenure for low and moderate income homebuyers. And that is before we deduct 6 percent realtor fees and other costs associated with selling. We would find comparable numbers for other bubble inflated markets like New York, Boston, and Washington D.C.
There are places like Detroit and Cleveland in which house prices are not at bubble inflated levels. In such markets, these plans would make sense. But in most of the areas where plunging house prices are leading to waves of defaults and foreclosures, these sorts of bailouts would just end up giving money to bankers and mortgage holders who are losing their shirts. They do not end up helping homeowners.
We got into this disaster because people in policy making positions refused to do simple arithmetic and therefore could not recognize the housing bubble. We better get these people to do a little arithmetic now, before they hand hundreds of billions of taxpayer dollars to the banks that fueled this disaster. There are better alternatives that help homeowners without giving tax dollars to the banks.
Comments (35)
I think certainly that your ideas have some merit. However, the crisis in the rust belt has more to do with rising interest rates coupled with job loss or lack of income growth rather than house values. As you correctly stated the Rust Belt cities have not seen the run up in values that the major centers of Chicago, NY, LA......So I am not sure offering them to rent is a possibility unless the government is in a position to subsidize this heavily. The sheer amount of beauracracy needed to get this done will be substantial and not a practical fix to be done in a short term.
As well your figures for renting seem to be off in those major centers. Rent for comparable housing would be close to the figures you mention. Yes, you get alleviated the property tax problems but for the majority of foreclosures that isn't the problem.
Lastly, we can't hide our head in the sand and think that our banks or banks in other countries are all fine. They aren't. I am sure we don't really want to see what numbers Bear Stearns was dealing with. Safe it to say I don't think we need to be going en masse to our banks and asking for our cash. Its not there. So, a banking bailout of some sort is in the cards. We can sort out who needs to go to jail later but there needs to be some infusion of confidence back into the system. The overall effect on the business cycle is liable to be devastating. Consumer spending has slowed and will continue. Business investment will dry up. We've got a serious problem. I just hope that folks in Washington are thinking about the answers..To date, I don't see it.
March 28, 2008 11:32 AM | Reply | Permalink
I'm betting your numbers are wrong. While the median rental in LA maybe $1000, that is a property that would not be comparable to to the median house. No one could afford to landlord a house for that -- you can't even do that in the mountains of Colorado, where the median house price is 420, but the median rent for a comparable property is $2300 -- pretty much in line with P&I.
There is still a bubble, prices are still inflated, and the bailout might not help. But the rest of the economy won't improve until housing does, and housing won't improve until the public beleives that hmes are a safe investment again. Anything the gov't does to encourage that will, in the end, help turn the recession around.
March 28, 2008 11:46 AM | Reply | Permalink
Yes, I think your median rent figure is too low--it's probably for all units. The median figure for a two-bedroom unit, the nearest comparable for a house, is about $1300 a month. But that only makes buying a bit less of a bad idea.
March 28, 2008 12:41 PM | Reply | Permalink
Not so fast!
As an econometrician I studied the link between housing purchases and eventual wealth. We studied wealth distribution as a result of recessions and depressions. Our results showed those who are wealthy going in get wealthier during a recession by buying at depressed prices.
I think the lesson we should learn from history is: We need to intervene in the foreclosure process. We need to pair bank relief with mortgage relief.
Based on this research we need to give mortgage relief to avoid prolonging the recession.
Unless there is intervention, the market causes Mortgageholders to foreclose in waves. Foreclosing in waves prolongs the recession and ends up giving a windfall to the Mortgageholders.
Mortgageholders foreclose on the most hopeless first. Due to low resale values they leave the marginal borrowers in their homes.
Governments, grant credit to the banks - but do not take ownership of the mortgages or mortgage properties! Contrary to common sense they also do not require the banks to readjust their existing mortgages in relation to the lower cost of funds due to credit injections and funds provided to the banks!
Each time the value of houses rises, or when interest rates rise and bank can loan the money trapped in the foreclosed property at a higher interest rate, the Mortgageholders are motivated to foreclose on an additional tier of borrowers. If interest is allowed to continue on the mortgage the debt grows faster than equity, the moment the house value exceeds the likely payments from the borrower the Mortgageholder forecloses. The banks make a windfall especially if they are allowed to collect a deficiency.
This continues to drag both housing values and consumer confidence down. The cycles become predictable and consumers begin to react negatively as they see homeowners making market rate payments on a home being forced out of their homes to allow banks or tax collectors to make an excessive profit on a foreclosure. After the depression we had “foreclosure riots” where homeowners or farmers banned together to stop foreclosure sales. In farming communities these communities created economic disincentives to invest in foreclosed property buy burning any property the farmers were forced out of. Many of our strict foreclosure laws, and bankruptcy provisions, were enacted as an economic response to the problem created.
I think the lesson we should learn from history is: We need to intervene in the foreclosure process. We need to pair bank relief with mortgage relief.
March 28, 2008 12:59 PM | Reply | Permalink
Interesting.
As I see it, the housing bubble has been created by banks that were willing to lend too much money. They are the source of the problem.
The loss of value in homes, then, should come out of the financial hides of the banks - not the homeowners.
I also read that the foreclosure process itself costs another 25% of the value of the foreclosed home.
Is there a system that could be established that writes the value of the home down to a realistic level, allows the homeowner to remain in their home, and avoids that 25% "foreclosure penalty" while causing the banks to take the loss of the price decline as the bubble they created deflates?
That 25% foreclosure penalty provides an incentive for the banks to write down the mortgages to a realistic level without kicking the current registered owners out. But the banks aren't going to do it on their own, since they can keep the original inflated value of their mortgage and hope for a bailout.
It looks to me like the banks should be disabused of the idea that their inflated financial instruments will be bailed out, and there needs to be an agency established that accepts homes otherwise in foreclosure and rewrites the mortgage at a more rational level without charging foreclosure penalty fees and without transferring ownership of the property to wealthy vultures looking for a bargain.
That institution might be run through the bankruptcy courts.
Is that the kind of situation you are describing, Steve-in-Seattle?
March 30, 2008 1:38 PM | Reply | Permalink
More thoughts.
"Property" is a set of rights to use and dispose of something that can be individually defined and kept from others.
"Wealth" is the collection of property rights an individual can exercise.
Those property rights and the definition of what is property are defended by social tradition and, when things get complicated, by government. (That's why courts exist. Control, sale and inheritance or other transfer of property are the original function of courts.)
Should the mere possession of wealth when others are losing theirs permit those with greater wealth to accumulate that of those who are losing theirs at a discount? I see no social value in that.
Ownership of property means that the right to decide its use in assigned to a particular individual. Knowing that he has that right and that he will not be interfered with in certain decision areas, he can plan for its long term use. That's why a man's home is his castle.
So what is the social value of allowing great accumulations of wealth to exist, and to grow larger merely because wealth allows the owner to take advantage of those with bad luck? Society needs workers who make things and entrepreneurs who organize institutions that make better use of workers.
Society does not need inheritors of great wealth who use the wealth itself to gain power to defend their wealth and power.
I guess I am trying to work out the logic of keeping the wealthy from accumulating ownership of the property of people who are losing it because the economy they depended on was pumped up by banks overvaluing homes that then getting the owners to extract that fake value for consumption.
The Banks created the Housing bubble. They should not be allowed to take advantage of its collapse just because they still have wealth.
But the same argument would apply to any inherited (unearned) wealth that is allowed to grow just because wealth creates more wealth. It's the control aspects of property ownership that seem to be the problem.
Because a person has wealth he can control the behavior of those who don't. If you need to rent a home, you become a supplicant to the landlord.
So I guess I can see the need for mortgage protection as the housing bubble works out. It needs to avoid centralizing control of property in a few wealthy hands. The bankruptcy courts already institutionalize much of the process needed, they just need to be used to create a cheaper institutional response to default on the mortgage than foreclosure and change of ownerhip of the property.
As for bailing out the banks, we already know how to do that. The institutional structure was put into place during the S&L bailout. Only then it was designed to concentrate wealth and control. That needs to be prevented this time.
That would make the British solution of taking over the failed Blackstone Bank and continuing to operate until later selling it off it better than the American solution of selling Bear Stearns to J.P. Morgan and creating greater centralization of control of property - that is, avoid greater concentration of wealth.
This is just working out some thoughts based on your post, Steve.
March 30, 2008 2:15 PM | Reply | Permalink
The size of the problem can't be easily understood. Its larger than we can all imagine. Simply doing what was suggeted might help but its going to take years before values start to show another increase. Then, borrowing for folks that were foreclosed on will be next to impossible forcing them into rental situations that are not good for them or the neighborhoods they live in.
Stability comes from home ownership in this country.
The volume of property that is now on the market is also historic. To draw down those stocks to a point that we are going to start building houses and values again.....well its going to take a long while.
Washington can hide its head in the sand and think that we aren't in a recession/depression all it wants by pointing to the "classic" definition. But as any student of economics knows the science is fluid and what may solid logic today falls on its head tomorrow.
March 28, 2008 1:02 PM | Reply | Permalink
I, fortuitously, own a beach cottage in LA worth 2 million and rent it out for 3 thousand/month. (Purchased in '76 for $113 thousand, the going rent then barely covered the mortgage payments.) I've obviously been an on-the-scene observer of the 'Great Bubble' not to mention the present disparity between rents and the value of the rented property.
March 28, 2008 1:39 PM | Reply | Permalink
Great point. Stepping in and just allowing people to rent helps who? Only the guy holding the paper not the renter.
One other thing that we constanly get wrong these days is putting our faith in the "Healthy Corporate Balance Sheet" mantra. Increasingly healthy balance sheets for multinationals depend on business or operations outside the US that may benefit the company but not the country. Its long time that we stopped thinking what was good for GM/GE/Microsoft was good for America. It isn't.
March 28, 2008 1:50 PM | Reply | Permalink
I used 75 percent of the median sale price for the calculation, so that has to be pretty close to the median rental unit. I certainly doesn't change anything if you knock it down by another 10 -15 percent. The point is still the same, unless you want to impoverish these people, they would almost certainly be better off as renters. The question is whether we are trying to help the bankers (that is who gets the check in this story) or the homeowners.
The numbers show that these bailouts help bankers.
March 28, 2008 6:41 PM | Reply | Permalink
Dean, Who do you help when you allow people to rent? The banks who hold the notes. Its even better than a bailout since they can cover the paper and still keep the value of house on thier books as is. The homeowner won't be able to keep renting like that forever if they aren't employed which is mostly the case in the worst effected areas. I'd suggest a ride around the Slavic Village in Cleveland to get a real view of the problem.
March 28, 2008 7:31 PM | Reply | Permalink
Louisville,
my plan gives homeowners an opportunity to block foreclosure that they don't currently have. It gives nothing to lenders. If this helps the banks, I really hope that you will tell them how.
March 28, 2008 11:00 PM | Reply | Permalink
I agree that the rent spread suggested here is way exaggerated-- though the real numbers are bad enough. The correct way to look at this would be to gather figures on houses that were bought at the height of the bubble and are now being rented out. How much are these landlords getting in rent and how much are they paying out on the mortgages (plus taxes and insurance)? I can even give you a data point from Fort Lauderdale, one of the main hot spots of the bubble: our landlady, a would-be flipper, bought our house in late 2005 and is paying $2200 a month in payments (includes escrows). Our rent is $1600. That's a $600 spread, but not "two to three times". Obviously the situation is not sustainable, but we're moving in two months anyway so not our problem.
March 28, 2008 11:01 PM | Reply | Permalink
our landlady, a would-be flipper, bought our house in late 2005 and is paying $2200 a month in payments (includes escrows).
How do you know? Only the mortgagor and the mortgagee know for sure what the former's been paying the latter.
March 29, 2008 7:32 AM | Reply | Permalink
Re: How do you know?
Because I assume she is not lying when she tells me what her payment is. We had originally been interested in buying the house, before I found out my job was transferring me out of state. We did some preliminary dickering with the landlady (whose asking price was unacceptable, and way higher than what she paid-- which is a matter of public record) and she told us what her payments were.
March 29, 2008 12:50 PM | Reply | Permalink
Your numbers are still skewed. If you're comparing apartment rentals to SFDs, that doesn't add up. If you want to use the 1000 rental number, then figure it against condos of equal size in equal neighborhoods.
If you can find a house that rents for 1000/mont in a neighborhood of homes that sell for 550, then your argument holds. But you won't.
I don't like goverment bailout any more than the next person, and I agree that the culprit here is that houses cost too much when compared to income. However, there's no correcting that it the short term. But the other reality is that houses are most Americans' largest investment. And helping protect us from catastophes -- even our own mistakes -- is what goverment is for.
March 28, 2008 11:12 PM | Reply | Permalink
Your numbers are definitely off, but not too far off. I ran similar calculations when I was getting ready to sell my place in California. I sold in mid-2002 (a couple of years too early but I could not tell when the bubble would end). According to Zillow, it sold for almost 40% more than that again in 2004 or 2005 (I forget which, anyway somewhere near the peak), went up almost another $100k in comparables, and is now about halfway between what I sold it for in 2002 and what my buyer sold it for in 2004 or 2005. It needs to come down to somewhat below what my buyer paid to be "reasonable", given that rents there have risen. It need not, however, come all the way back to what I paid for it in 1995 (which is what your numbers suggest).
I expect that rents will continue to rise even as prices continue to fall, so that the "economically sensible" crossover point is reached sooner than one would get just by computing the "right" price based on current rents. It will, of course, overshoot, creating buying opportunities. As always, I will fail to time them perfectly, but I hope to time them profitably. :-)
March 29, 2008 3:07 AM | Reply | Permalink
Rents are only going to rise if incomes rise. Since incomes have not risen in real terms since 1970, what's the chance of that?
Otherwise the only rise in rents is going to be that caused by inflation and reflected in wages.
March 30, 2008 2:29 PM | Reply | Permalink
Well, this gets into very sticky territory, where there are, if anything, too many statistics instead of not enough.
I contend that real incomes did rise somewhat in the 1990s, for instance. It was just that the 2000s took it all away again.
In any case, rents rising with inflation, along with house values falling from deflation—and yes, it is possible to have both at the same time, as long as they are in different things or areas—should be included in "rising rental rates" calculations, at least for the purpose of figuring where it becomes sensible again to be a homeowner.
March 30, 2008 6:59 PM | Reply | Permalink
What about a simple change to foreclosure law which requires the purchaser at sheriff's sale to keep the current occupant (that is, the former mortgagor) in the home paying market rents until the home is sold to an owner-occupier?
March 29, 2008 8:18 AM | Reply | Permalink
Ellen, that is an essential part of the plan Dean Baker is proposing. If you follow the link in the last sentence of his main post, you'll see what I mean.
Basically, DB is proposing that the bank takes ownership of the property, but must allow the former owner to stay there and pay fair market rent (determined by an appraisal). If the bank sells the property to someone else, the new owner has to continue the rental deal.
Dean, it seems to me like a reasonable plan. Nice job on The News Hour this week, by the way (was it Wednesday?).
-- ARG
March 29, 2008 10:38 AM | Reply | Permalink
I'm not sure you're quite right.
IIRC Dean's plan continues the foreclosed mortgagor as an equity participant; mine turns the mortgagor into a tenant, only -- which doesn't mean that the tenant would be prevented, if financially able, from buying the property from the new owner at a price the two parties negotiated.
My plan would include the non-owner occupied homes, as well, and keep current tenants, a group seemingly being overlooked*, in the premises. My concern with Dean's plan is that I think it has most of the downside associated with rent control and more importantly, unduly delays clearing the market.
* 44% of California foreclosures are of "landlord" owned homes and their tenants are being evicted by the mortgage servicers post-foreclosure sale.
March 29, 2008 11:08 AM | Reply | Permalink
The "rent control" here is the market rent. If someone can show me evidence that allowing landlords to charge the market rent creates a problem, I'm all ears.
btw, in my story, the former homeowners have zero equity stake if they become renters. The idea is that the vast majority would not because the banks would work out deals that allow them to remain homeowners, since the banks don't want to be landlords. But, if the house goes back to the bank, then the former homeowner loses any claim to ownership rights, they just have the right to rent.
March 29, 2008 12:29 PM | Reply | Permalink
"Gives homeowners facing foreclosure the option of renting their home for as long as they want at the fair market rate." Baker Plan
1. Fails to benefit tenants in occupancy. Indeed it benefits the mortgagees who lent to flippers and speculators who are now leasing these properties to defray their current expenses by excluding those mortgagees from the plan.
2. The rent control problem: A property which should be returned to the owner-occupier market as soon as possible is held hostage by the statutory tenant (that is, the prior foreclosed mortgagor) as a rental unit.
March 29, 2008 3:41 PM | Reply | Permalink
Dean, I'd be curious to hear your opinion of the new plan proposed Friday by the Bush administration.
"Bush proposes financial regulation overhaul"
"Plan would expand powers of Federal Reserve"
http://www.msnbc.msn.com/id/23853415
Probably this deserves its own thread.
-- ARG
March 29, 2008 10:41 AM | Reply | Permalink
On the comparisons, these are of course crude, but keep in mind that we know for certain that nationwide house prices increased in real terms by more than 70 percent since 1995 while rents increased in real terms by about 5 percent. This means that if there was some rough balance between ownership and rental costs in 1995, there will be huge disparities today.
Furthermore, we know that in some of the bubble markets that I mentioned, real house prices (quality adjusted) more than doubled over this period, while real rents may have risen 10-20 percent. So, the ratios that I am finding are not inconsistent with very solid price data over the last dozen years.
March 29, 2008 11:55 AM | Reply | Permalink
Re: This means that if there was some rough balance between ownership and rental costs in 1995, there will be huge disparities today.
For a rental market to even exist at all in a normal economy, presumably the cost of ownership would normally be somewhat less than a rental payment, otherwise no one would ever rent out a house. Normally, a landlord expects to be making at least a small profit on the deal, not going hundreds of dollars in the hole every month the way our landlady is.
March 29, 2008 12:49 PM | Reply | Permalink
For a rental market to even exist at all in a normal economy, presumably the cost of ownership would normally be somewhat less than a rental payment, otherwise no one would ever rent out a house.
Well, not exactly. The comparison is complicated by taxes, equity, and so on. For instance, if I were willing to tie up half a million in real estate, I could buy a "$570k" house for only $58k (570 - 512). My PITI is thus fairly low, consisting more of taxes and insurance (P+I for 30 year mtge at 7% is $386/mo, tax at 1% is $5700/yr or $475, for insurance I'll take a guess and say another $130/mo). This keeps my cash outlay below $1000/mo, so if I can rent it for $1200/mo on average, I end up cash-flow positive. (I also get to depreciate on taxes, which helps me even more.) If the house price keeps up with inflation, or gets ahead of inflation, I end up with a capital gain when I sell, too. Moreover, if I can raise the rent each year, what starts as a very small positive cash flow ($1200-$1000 = $200/mo) may end up as a much larger one (taxes held down due to Prop 13, rent increases at 3%/yr, by Year 20 rent is 1.8x or $2160/mo, now I get $2160-$1200 = $960/mo [tax and insurance are up $100 each here]).
However, this ignores "opportunity cost" on the $512k I sink into real estate. It also assumes that this house is going up in value, and faster than inflation is eating away at its value. And of course there are those huge transaction costs and so on, when I do buy and sell. These factors really chew into any positive cash-flow scenarios.
(Also, note that rent "on average" is a problem since most rental property is unoccupied a couple of months a year. I have set up various experimental spreadsheets on these things over the last few years, trying to decide when to invest in rental property. They keep coming up negative for now.)
March 29, 2008 5:24 PM | Reply | Permalink
Ellen--
State law could protect tenants in foreclosed buildings. It would require only the imposition of rent control/just cause eviction regulations that did not allow foreclosure as a just cause for eviction. In California some communities have rent control/just cause eviction ordinances and these have prevented evictions in some cases. Unfortunately the real estate lobby was able to get single family units exempted from local rent control laws, so there are lots of unprotected people even in jurisdictions with rent control.
March 29, 2008 1:42 PM | Reply | Permalink
But does California's "just cause eviction" statute apply to single family rentals?
"Just cause" being violation of landlord's reasonable rules and of course, damaging the property or failing to pay rent -- or, and this is the most important exception in our case -- the permanent removal of the property from the rental market, that is, sale or gift to an owner-occupier.
March 29, 2008 3:55 PM | Reply | Permalink
I learned a long time ago when troubleshooting a problem, identify the symptoms first because they point to the problem. Foreclosures, investment bank failures, tight credit and so forth are symptoms. The real problem is the median income consumers are paid by business has not kept up.
So I ask the question.
Is the price of a house really outside the level of income of the average consumer or has the average consumer's salary not kept pace with the rise in the cost of goods?
From what I've read on the issue, I detect a reoccurring theme; people have mortgages way above their ability to financially maintain. The median income for a given metropolitan area should dictate the median housing cost. If the cost of ownership exceeds the median income earned, we end up where we are today.
The facts are obvious to the most casual observer that trickle-down economics never made it to the middle-class ... it evaporated. This whole mess is a result of flat wages over an extended period of time when the costs of goods and services were gradually increasing. The only way out of the mess would be for Congress to tie federal assistance to direct wage and benefit increases. Otherwise, the Fed is throwing money down a bottomless pit and we'll see this cash-sucking monster again in the not too distant future.
March 30, 2008 3:37 PM | Reply | Permalink
Tahut,
the cost of housing increased far faster than anything else in this decade. Up until 2001 the median house price and the median income were in step. It is a fairly recent phenomenon that they diverged.
March 31, 2008 4:21 PM | Reply | Permalink
I am hoping Dr. Baker's plan is implemented, because if so, I plan on shorting stock in banks and mortgage companies, because they will go under. I call your attention particularly to item 6:
So let me see if I understand this correctly. I'm a subprime homeowner who just got foreclosed upon. Under Dr. Baker's plan, I could continue to live in the same house indefinitely, at a rent that is less than my former mortgage payment because the "fair market value" of my house has fallen since I took out the mortgage. Who's the landlord? I suppose it's the bank or mortgage company. Now, since they are eeeevil profit-making enterprises, they'd naturally like to sell the house at some point in order to recoup some of their losses. However any future buyer would be required to keep me as an indefinite tenant. Why would I ever want to leave? I'm in the house I always wanted anyway and I can never be evicted. So I wouldn't own a house, but big deal - for all intents and purposes I get one anyway!
This is a great way to turn subprime borrowers into a class of property-less renters forever. It's also a great way to turn banks and mortgage companies into gigantic slum lords, because they will have zero financial interest in maintaining this property since they'd never be able to sell it anyway (who'd want to buy it if they wouldn't be able to move in?).
And this doesn't even get into how one decides if a mortgage is "predatory" or not, and what banks are supposed to do with all of this property that is unsellable.
March 30, 2008 10:44 PM | Reply | Permalink
Ellen--
At present there is no statewide rent control/just cause legislation in California. Some communities (most notably San Francisco, Oakland, Berkeley, Santa Monica and Los Angeles) have local ordinances. When the real estate interests couldn't get these laws repealed at the local level, they asked the State Legislature for help and, of course, received it. The result was Costa-Hawkins, which placed severe limitations on local rent laws, the most important of which were vacancy decontrol of all rent-controlled units and the exemption of all single-family houses from rent control legislation.
However, single-family homes can be covered by just cause eviction protections, and many communities have chosen to give these protections to those who rent single-family homes. (The lenders are quickly figuring out, unfortunately, that the way around this little problem is to increase the rent. One family in Oakland received a rent increase to $10,000 a month.)
But were the lender to sell the property to someone who wanted to occupy it as a primary residence, the new owner would be able to evict the sitting tenant for that purpose. The lender, however, cannot evict under the owner-occupancy just cause, as the lender cannot occupy it as a primary residence.
March 31, 2008 7:47 PM | Reply | Permalink
I think Dr Baker's plan is one of the better plans available. It allows banks more time to absorb their huge losses while not using any of taxpayer money. It's good for the community and the foreclosed owner since they can stay in the house that they like (supposedly since they bought it to live and not as a way to double their home value in 10 years???). The big concern I have is with regards to the indefinite stay aspect. Evicting the renter so that the new owner can use it as a primary residence can be a long and expensive legal procedure for the owner. Maybe we can just have a 6 month prior notice clause to evict the renters for owners who use it as primary residence instead. Or just let the renter have a 1 or 2 year lease. The details can be worked out but overall I support this proposal more than what our politicians have.
April 1, 2008 2:02 PM | Reply | Permalink